Monday, May 18, 2009

Skeletons in the Closet-What an Acquirer May Really Be Looking For

The following is an excerpt from Privately Held Company Newsletter.



The due diligence process involves the acquirer's financial team, the legal team, and may also include other experts used to review additional areas of the target acquisition. Since this process includes a thorough examination of the details of the business, it is important that prospective sellers become aware of any "skeletons in the closet" due diligence may uncover. While some questions follow that may help identify the skeletons lurking within, a business intermediary professional is an excellent person to help a seller become aware of other potential issues and how to deal with them.



Management


  • Is the owner/president/CEO constantly interrupted by telephone call, emails or other diversions that require immediate attention? These interruptions may indicate a business in crisis or a general failure of management to control the business.

  • Do employees seem to take pride in what they do and also in their company? Are they happy?

  • Does the business experience a lot of turnover in either management or at the general employee level?

Marketing



  • Is the company experiencing loss of market share, especially when compared to competitors? Price increases may increase dollar sales, but the important measure is unit sales.

  • Is the company introducing new or improved products or services? A firm's ability to do this is a critical part of the operation, affecting its success and potential for growth.

  • Does the company participate in trade shows? Is the interest level high, or is the activity over at a competitor's booth?

  • Does the company have an excellent Web site and is it technologically above the competition?

Finance

  • Does the firm produce monthly financial statements? Are the annual financials produced on a timely basis?
  • Does the company take advantage of trade discounts, or is it late on paying its bills? These practices could be a sign that the company has poor cash-management policies.
  • Are the margins and benchmarks better than industry standards?
  • Has the company used its entire credit lines and, if so, how (and why) have they been used? Is the firm on any kind of credit watch?

General Business

  • Is the firm in a stagnant or even dying market, and can it shift gears quickly enough to make changes or enter new markets?
  • Does the company have too many suppliers - or not enough? Is the inventory turnover better or worse than the competition or industry standars?

These are just a few of the business areas that an astute acquirer would investigate, but these areas may be outside the scope of the general due diligence procedures.

The due diligence on the financials and the legal aspects are obviously very important, but the answers to the above questions may ultimately determine whether the offered price is held firm or even if the sale is finalized.