In the course of an acquisition, “due diligence” is often regarded as a built-in part of the process – a formality to be checked off once it’s completed. However, acquisitions that conduct thorough and competent due diligence have a greater chance of success because decision-makers have the quality of information they need to make a decision.
Hiring a third party for due diligence can provide an added level of information and peace of mind. An experienced diligence provider can help you take a close look at important key areas. With the right partner, you can gain the insights necessary to strike a deal with confidence and avoid many of the hazards that buyers often encounter.
Here are five key areas where due diligence can deliver vital insights:
- Integrity of the company’s financial reporting
Financially speaking, is your target acquisition really what it appears to be? The single most important goal of due diligence is to ascertain the accuracy of the company’s income statements, balance sheet, the quality of earnings and other reports. Fundamental questions like these are at the heart of any due diligence engagement:
- Does the target’s accounting conform to generally accepted accounting principles?
- Has EBITDA been properly calculated and reported?
- Are there underlying trends that a balance sheet might not reveal?
- Unforeseen (or unreported) costs and obligations
In the past, the HORNE Capital team has uncovered items such as management compensation packages that were due to deliver after the date of the acquisition. Had it gone undetected, this future cash obligation would have had serious implications on the overall success of the acquisition.
Unforeseen costs come in a variety of forms, such as balloon payments on loans and contract expiration dates with key clients or vendors. With proper due diligence, you can help ensure that post-acquisition surprises are minimal.
- Hidden risks and liabilities
One of the most important aspects of due diligence involves identifying possible hidden liabilities, including unresolved litigation, regulatory compliance issues and other items that could result in future litigation, fines or judgements.
These liabilities could be associated directly with the company, or even with current or past employees. In many cases, buying shares or ownership of the company transfers the liability to the buyer.
It’s not enough to simply ask management about potential issues; in some cases, management may not be aware of the exposure. Competent due diligence can help you spot liabilities like pending, threatened or settled litigation that could impact the terms of, or even halt, an acquisition.
- The company’s business structure and practices
Articles of incorporation. Bylaws. Terms and conditions expressed to board members, shareholders and partners. It’s important to review corporate records for any type of partnership agreements, vendor/supplier relationships or contracts that could represent obligations or liabilities after the sale.
- Strategic and operational fit
Are you looking for more than a new revenue stream? An outside partner can help you determine whether an acquisition will secure the market expansion, customer base, extended product portfolio, new capabilities or other strategic objectives you’re hoping to gain. They can also give you insights on how easily the acquisition will integrate into your existing operations and identify some of the post-transaction obstacles you may encounter.
A value-based approach to due diligence
At HORNE Capital, we provide clients with a value-based approach to due diligence.
What does that mean to you?
First, we give you access to a broad range of capabilities designed to deliver the full benefit of thorough due diligence.
Second, we’re agile enough to tailor our services to match the challenges that your acquisition presents — minor or complex.
We believe that this flexible approach enables you to get the protection you need within a framework that delivers optimum value.
Is there an acquisition in your future?
HORNE Capital is committed to delivering the insights and information you need to conduct a successful acquisition. If there’s an acquisition in your future, contact us for a complimentary, no-obligation consultation on our due diligence services.