Whether you’re buying a car, a
house or a company, you want to
know you’re buying a good product at a fair price. That’s why proper due
diligence plays a crucial role in successful
mergers and acquisitions.
“I don’t see buying a company as a
whole lot different than purchasing a car,
a house or any other asset,” says Mark J.
Kosminskas, partner in the Corporate
Practice Group at Levenfeld Pearlstein,
LLC. “You need experts in different areas
to ‘look under the hood’ to avoid unpleasant surprises, determine the extent of
repairs and identify deal killers as early as
possible in the process.”
Smart Business spoke with Kosminskas
about what should be included in due diligence, who should complete it and how to
accomplish it most effectively.
Why is due diligence a critical process for
buyers and sellers?
With sellers, it’s ideal to perform a due
diligence review at least 90 days before
they go to market so that they can look at
their company through the buyers’ eyes.
This helps them discover areas of concern and allows them to develop a
response to any problems before negotiations begin. Proper due diligence is like
running a restaurant — presentation matters. If you’re super organized and aware
of any deficiencies, it shows buyers that
you’re on top of your game and you mean
business.
On the buyer’s side, proper due diligence
ensures that the buyer hasn’t overpaid for
a company. It also protects the buyer from
undisclosed liabilities that could lead to
unanticipated expenses in the future.
From both perspectives, identifying
material problems as early as possible is
important. Mergers and acquisitions are
very costly and the earlier in the process
any deal breakers can be identified, the
better. It’s kind of like dating — it is better
to find out on the first date rather than the
12th that the relationship is destined to go
nowhere.
What are the key areas for performing due
diligence?
Financial: The buyer’s CPA firm usually
completes the review of the company’s
financials and accounting methodologies.
One of the benchmarks for a well-run
finance department is that the month-end
books should be closed within 30 days. If
that can be achieved, it indicates that the
company has sufficient staff and efficient
procedures, which result in timely access
to key indicators for management.
Legal: Legal due diligence involves
everything from checking the corporate
documentation and records to reviewing
loan agreements and contracts, outstanding litigation, and legal compliance.
Operational: This area covers ‘time
and motion’ analysis and answers these
questions: What does the company do?
How does it provide goods or services?
How does it sell them? A consultant or an
area expert, such as a plant engineer, can
review these processes.
Strategic: Good company buyers perform a SWOT (strengths, weaknesses,
opportunities, threats) analysis and will
not only analyze what they see today but
also what they expect to see tomorrow.
Potential buyers need to look for synergy
and project growth opportunities three,
10 or even 20 years down the road.
What are the areas that pose the most risk or
are sometimes overlooked?
It’s important to remember that material
problems vary deal to deal and company
to company. Where you spend time and
money in due diligence is very industry
dependent. If you were looking at a 30-year-old paint business with 14 plants
across the country, you would want to
bring in environmental experts to examine
environmental compliance. Conversely,
with a software company, you would turn
to intellectual property experts to focus on
checking your IP rights and protections.
That being said, there are two areas that
always stay on my due diligence list:
Capital expenditures: It’s tempting for
owners to curtail capital expenditures
when they’re planning on selling. If I’m a
buyer, I need to not only look at the historical numbers but also project how
much cash the company will generate and
how much I will need to spend on future
capital expenditures. If the owners
haven’t kept up on these investments, that
will affect what the buyer is willing to pay.
Cultural integration: Even if a company looks great financially, legally, operationally and strategically, it’s really
important for managers to do a temperature check on whether it’s a good cultural fit with any existing platform company. If you try to blend a culture that is
very team-oriented and mutually supportive with a bunch of individualist
mavericks, it’s very likely that the merger
won’t go well.
MARK J. KOSMINSKAS is a partner in the Corporate Practice Group at Levenfeld Pearlstein, LLC. Reach him at (312) 476-7886 or
[email protected].
