Research by Harvard Business Review shows that over 70% of business mergers and acquisitions fail. So, how do you give your acquisition the best chance of success? Here’s a checklist for you to use to help you avoid the pitfalls.
There are three main elements of due diligence: commercial, financial, and legal. You may read that and think, “Dealing with accountants and lawyers—what could be worse?” But it doesn’t have to be as painful as it sounds.
If you’re funding the acquisition from your cash flow, then the amount of due diligence is up to you. If you’re using bank funding, you must check what level of due diligence that the bank demands.
Considering a deal
- Remember this phrase when you scour the company accounts: “Turnover is vanity. Profit is sanity. Cash is reality.”
- How much gearing (the ratio of company debt to equity) is safe to introduce into your business at this time?
- Don’t let naysayers talk you out of it. Business is about assessing risk and making decisions and backing yourself once you’ve made them.
Commercial due diligence
- Use your skills and experience. No one knows your business better than you. Consider doing your commercial due diligence yourself.
- Does the deal size mean the bank needs a market report?
- Is the business a natural fit for you or does its success depend on cross-selling in the future?
- How will your competitors react to the deal?
- Write yourself a brief commercial due diligence report. If you can’t convince yourself, think again.
Financial due diligence
- Consider doing this yourself. You know what to look for, and where to look for it.
- Are there any golden nuggets that the current owners don’t realise are there?
- What are the two or three critical factors of the target? Satisfy yourself about these. Everything else can wait till later.
- Inspect and analyse the management accounts.
- Verify all information provided against all other available sources.
- Do all the figures look sensible to you? If they look too good to be true, they probably are.
Ask ‘stupid’ questions
- There are no silly questions in due diligence. The simple questions unearth the most important issues.
- If you’re not satisfied, ask the question again and again until you are.
- Check out critical facts with more than one person in the business. People less involved in negotiations are more likely to be honest with you.
- Don’t get blinded by the thrill of the deal. Be critical. If it walks like a duck and talks like a duck… it’s not a swan.
Legal due diligence
- Simple advice: use a lawyer you trust. Their role is to help you get the deal done safely.
- Listen to your lawyer’s advice, but instruct them on the commercial aspects.
- Asking for too many warranties can kill a deal. Both sides need to be reasonable.
- Finally, try to sign the deal in daylight hours. Why does it always happen the middle of the night?
Peter Swift is the Group Financial Director of Peninsula and has been with the company for seven years.
After graduating from UMIST in Mathematics and Management Sciences, Peter spent ten years at KPMG in Manchester and the City before entering into industry, where he has been involved in a number of leveraged buy-outs, most notably the MBO of Fermec Holdings from Massey Ferguson in the 1990s.