Let due diligence take the risk out of deal doing

Date: 18-08-2016

Tagged as: GameplanStrategyGrowthFinanceM&ADue Diligence

 

Due diligence (DD) has always been a watchword for business acquisitions, but high profile cases where it has spectacularly failed have pushed the term into general parlance. We take a timely look at why rigorous DD is crucial and provide a checklist for businesses.

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Jay Z’s 2015 acquisition of Tidal and parent company, Aspiro, for $57m was billed as a victory for online music streaming and fair pay for artists. Value was allegedly based on statements that Tidal had 530,000 worldwide subscribers and was in robust business shape – facts that are now claimed to have been erroneous. In March 2016, Jay Z’s legal team served proceedings against the former owners, seeking to claw back around $15m1.

Meanwhile, the recent scathing indictment of MPs investigating the collapse of UK retailer BHS was that leading advisers “had failed to carry out proper due diligence on the buyer of the retail giant”2. The 88-year old firm, sold for £1 in 2015, collapsed just a year later with the loss of over 10,000 jobs and a huge pensions deficit, proof that due diligence, or in this case the lack of it, can have a huge impact on your business.

Rising M&A activity

In 2015, global mergers and acquisition (M&A) activity reached its highest level since 2007 – with over $4tn worth of deals3. The mega-deals may attract most of the headlines, but the UK’s mid-market has also seen an increase in activity of this type4.

Given the breadth of this trend, it’s likely to be a strategic consideration for any business ambitious for growth. And while many business leaders might have been forgiven in the past for leaving the nitty-gritty of DD to their legal and advisory teams, the associated risks uncovered from the BHS and Tidal examples show that it’s worth ensuring any step in this direction is taken with confidence.

Due diligence checklist

Attaining that level of confidence takes robust strategic planning and there are no shortcuts. Every deal is different, but there are some key points you should always consider:

  1. Think of DD as a mission to rigorously audit every aspect of your target’s business.
  2. Build a DD team with appropriate skills and experience and clearly set out their responsibilities.
  3. Prepare a confidentiality agreement to allow the free movement of sensitive information.
  4. Create a timeline with critical points highlighted.
  5. Draw-up a list of the data you need – everything from financials and accounting to personnel issues and supplier contracts.
  6. Create sub-team tasks that clearly reflect the risks of individual functions within the business and ask key questions, including:
  • Do the target’s financial statements correspond with the actual financial conditions of the business?
  • Are there any significant or potential risks, including regulatory or governance?
  • Have future costs been factored into the valuation (i.e. pension liabilities)?
  • Is the culture a good fit?
  • How will the integration of operations impact the profitability of the business?
  • Will key skills and experience be retained?
  1. Don’t let your sub-teams work in silos – keep a handle on everything.
  2. Produce a comms plan for external and internal communications.

The aim of any due diligence project is to know your target inside out. Meticulous detail is crucial – but so is honesty. The process can throw up answers you don’t want to hear and it can be disheartening if the target you’ve set your cap at turns out to have lead boots. Through adopting a comprehensive approach to due diligence you give yourself a better chance of uncovering – and solving – any business issues before contracts are signed and cash is exchanged.

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