Posts Tagged ‘mergers & acquisitions’

Due Diligence: Sometimes Even The Best Miss….

February 10th, 2010 Comments off

            One of the things that I love about what I do is the opportunity to continue learning, whether that’s during the course of my day:day activities, or through the actions of others….good or bad. One area I have a real interest in is that of acquisitions and the manner in which they structure and strike their deals. What’s even more interesting is how those same folks approach the due diligence process. For some, it’s about speed, trying to capture 90% of the key data, and hedging the other 10% in one form or another. For others, it’s about a slow and methodical approach, turning over every rock, and scrutizing every report, employee, past employee, vendor, and service provider. I’ve seen both approaches….and I’ve seen them both fail as well.

            In a recent dinner conversation with someone in my network, we were discussing a recent acquisition and the manner in which the due diligence was conducted. The entire due diligence process lasted all but a handful of weeks before the investors came rushing in. What was unfortunate about the situation is that the corporation had a real estate loan that was not reflected on the balance sheet, and the mortgage payment that was being made was reflected as a lease payment. A further unfortunate discovery was that the building was purchased only in the last handful of years when real estate was approaching a fully valued scenario and is now valued significantly less.

            Unfortunately, in the haste to conduct the due diligence, it appears the reviews went no farther than system generated financial statements, banking records, and reconciliations of vendor payables.  Yes, there was a review of stated assests, but only those reflected on the balance sheet. Although it was likely that there was not any ill intent in the actions of the incumbent owner, it was an unfortunate discovery. The omission on the balance sheet was, in further review, likely attributed to the fact the during the 10+ history of the company, there was never a CFO or other key financial figure. Keep in mind that the investor group leading this effort were seasoned professionals and had generated significant wealth in their execution of prior transactions.

            So how do you avoid such a predicament in your own future transactions? It goes without saying that the itemization below is not an exhaustive view of approaching an acquisition, but merely a start to analyzing every element of the situation…

·         Who are you really dealing with…have you conducted background checks on key stakehoulders?

·         Have you run a full credit review / D&B on the corporation to identify all loans, liens, and other considerations?

·         Are there reconciliations available for all material balance sheet items? Reviewed?

·         Has the existence of all material assets on the balance sheet been confirmed?

·         Have a review of banking statements, vendor purchases, A/P balances, and A/R balances confirmed figures reflected within the income statement?

·         Have all tax returns been submitted on time & correspond to the income statement?

·         Are there contingencies built into the agreement to hedge against any unforeseen risks, unknown off-balance sheet liabilities, or any other non-reported liens?

            Like I said, this isn’t even close to an exhaustive list, which should ultimately be an extensive punch list of data to review, forecasts to be developed and riddled with considerations, and ultimately, considerations given to the respective cultures and other intangibles. Truly a complex jigsaw puzzle to consider….


Thanks for reading . . . .


Jeffrey Ishmael

Why discuss Acquisition planning now? We’re not selling now….

January 23rd, 2009 Comments off

     I continue to work with both small and larger companies and continue to be amazed at the lack of real forward thinking when it comes to formulating long-term strategies for the entity in question.  In particular, the process of setting up a company for an eventual acquistion or the entrance of a key strategic partner.  Quite often the response has been “We’re not quite ready to put ourselves on the selling block” or “I think were atleast 1-2 years out from such an activity”. Did you really think about what you just said…?

     Let’s take the example of a smaller entity, that acknowledges they want to be sold, & that this is the stated goal within a few years. Let’s also assume that this entity is not ready now and has quite a bit of clean-up to do before deciding to start that fun little dance. Most Managers and Directors do not appreciate the complexities and depth that go into an effective due diligence process. Let’s start with only the top layer of information, which some companies even struggle to deliver:

  • Multiple years of auditied financials, tax returns, and supporting documents.
  • Documented internal controls and processes used for daily operating activities.
  • Implemented Budget and Forecasting efforts, along with reconciliations to judge accuracy.
  • Reconciliation of all H.R. related information to mitigate any post-deal employee lawsuit risk.
  • Reconciliation of all intellectual property matters, which support underlying business or identify areas of competitive risk or potential litigation.
  • Review of the management team, skillsets, and to determine if they will take the company to the next level.
  • Review of vendor listing to identify difficulting in sourcing or any single-source vendor risk.
  • Review of the customer list to determine depth/quality of customers and any single-customer concentration risk.

     Keep in mind, this is only a portion of the likely punch list. Starting to get the idea? This is not an effort that can be taken on and accomplished in a matter of months. To maximize the value that you’ll receive for the business, this effort needs to start well in advance and the planning process is immense. If you have not started going through and documenting these areas, then any attempt at a punch list will be half-baked and will not provide the most complimentary view of the company, thus resulting in a decreased valuation.

     The effort that will go into this exercise spans the entire organization and will likely be a large distraction from the business at hand if not properly planned for. The discipline to plan and enact the necessary change over a longer period will show that the management is consistent in their actions, show that they understand what it takes to change the business, shows that they are willing to make change, and ulitmately, will support higher valuations at the bargaining table.  Anything short of this will lead to varying degrees of discount in the final valuation. Want to improve your valuation?….then that’s why you start your planning now . . . .

Thanks for reading,

Jeffrey Ishmael

Private Equity panel: Definitive info or Hypothesizing?

October 29th, 2008 Comments off

Tonight I had the opportunity to sit in on a panel discussion on Private Equity and their views on the 2009 Outlook. The panel was hosted by the Pepperdine Graziadio School of Business. While not a Top-25 school, they’ve been doing some good work locally in expanding their alumni base and putting on some worthwhile events. The panel was comprised of three MD’s/VP’s with a variety of industry participation between them. The panel was moderated by a Thompson/Reuters contributing editor.

While I typically look forward to these events, I have to say that I was a bit disappointed in that tonights panel lacked some of the definitive information I always look forward to taking away from the event. While the group said they are still pursuing deals, the discussion centered around the common knowledge of lack of credit, lower multiples, lower debt requirements, and the emergence of more seller financing in deals. Thanks, but isn’t this the same information I’ve been reading about in The Deal magazine, hearing on CNBC, and seeing in the WSJ every day? Isn’t this the same information that’s been a topic of discussion at FEI events over the last 6-8 months?

For a Finance professional who is always looking to deliver additional value for shareholders, whether I’m looking to sell the business or not, it would have been more insightful for the panel to discuss how Buyers and Sellers can come to the table at such a difficult time in the market and structure a deal that is advantageous for both sides. If you’re a company that has no near-term pressure to sell or raise capital, how do you explore strategic alliances or structure minority deals in this market without leaving shareholder value on the table? The event would have been a better success if there was more definitive discussion and less hypothesizing about where the market might be headed.

Thanks for reading . . . .

Jeffrey Ishmael