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Pullestueck - Post Merger Integration

5 Mistakes to Avoid During the Post Merger Integration Process

Acquiring other companies for geographic and product expansion or merging with equal competitors are the most common strategies to increase corporate growth. However, the majority of M&A (merger and acquisitions) do not succeed. Public and private investors typically point to flawed due diligence and poor strategies, but another element is often overlooked: an absence of standardized post merger integration processes. A secure dataroom supports M&A transactions in business, but solid planning is essential to M&A success, especially for startups that are making acquisitions for the first time. Here, company owners can learn how to avoid the most common mistakes in the M&A process.

Setting Unrealistic Expectations During the Due Diligence Phase

Despite the dangers of unattainable goals, many companies still set them only to be disappointed when they’re not met. When a company fails to meet its objectives, employees become demotivated, executives are displeased, and the firm loses its credibility. However, some executives would rather micromanage staff than revise their expectations. By setting sensible goals, company owners can maintain momentum throughout the post merger integration process.

Lacking the Resources to Manage the Integration

Before the deal is closed, both companies should plan for integration, which presents multiple challenges in the IT, financial, sales, overhead, and cultural departments. If the companies’ personnel cannot quickly adapt to their new responsibilities and work toward a common goal, the post merger integration process will not be successful. Planning should start as early as possible, and a project management and leadership team can provide valuable guidance to both companies throughout the merger and acquisition process.

Failure to Retain Top Talent

For most mergers and acquisitions, the importance of the deal lies within the people involved. Retaining knowledge of both companies’ operations, customers, markets, and technology are crucial to the success of an integration. Executives from both companies should decide who to retain during the post merger integration process, and they should consider retention bonuses a necessary expense. Perhaps more importantly, executives should schedule regular meetings with key employees to keep updated and build a rapport.

Not Communicating Openly About Corporate Intentions and Behaviors

Communication for successful Post Merger IntegrationThe time after M&A is one of challenges and changes for both sides. Despite popular opinion, an acquisition isn’t always mutually beneficial. To calm anxious workers, executives often make unrealistic promises they cannot deliver. Setting employees up for disappointment is a sure way to lose top talent and, when that happens, all other aspects of the merger process become more difficult. It’s important to be honest from the beginning because, while there may be tough times ahead, staff can count on executives’ honesty, reliability, and candor.

Delaying Difficult Decisions

Most don’t like to discuss it, but cuts are a primary driver of the rationale behind M&A. Teams and projects are re-evaluated and modified, facilities are consolidated and, in some cases, certain employees’ jobs become redundant. While it may be unpleasant, delaying such decisions can increase costs and distract people from the other tasks at hand. Cuts should be decided on during the initial phase of the integration process when there’s another activity going on. When things become more settled, it’s harder to let people go. However, most departing executives are likely to be willing to help facilitate a smooth transition and part on favorable terms.

Integrating companies after M&A is equal parts art and science. There are many ways to finesse acquisitions, combine corporate cultures, and motivate staff—and not all of these methods can be documented. During mergers and acquisitions, there are certain steps to take and many problems to avoid. By staying away from the mistakes and issues listed here, company owners can ensure a smooth merger, high staff morale, and continued profitability.

Strategic Due Diligence

A Guide to Strategic Due Diligence

While due diligence may not be the most exciting topic, being able to evaluate and understand a potential partner, buyer, or acquisition is important to all growing companies. A virtual dataroom supports companies within these processes. The three primary categories of due diligence are legal, financial, and strategic. Although they have traditionally been distinct, an effective due diligence program combines elements of all three areas. In this guide, readers can learn about how legal and financial due diligence relate to strategic due diligence and how a data room can help organizations securely share important information during the due diligence process.

Legal Due Diligence

In the legal due diligence process, the goal is to examine the legal foundation of the transaction. For instance, a buyer may want to ensure the acquisition holds IP rights that are crucial to the company’s future success. Other areas to be explored include those listed in the section below.

  • Legal structure
  • Loans
  • Contracts
  • Property
  • Employment
  • Upcoming litigation

Legal due diligence and strategic due diligence are closely related because, if there’s little legal basis on which to perform the transaction, the buying company must change its assumptions about the target company.

Financial Due Diligence

During the process of financial due diligence, the buyer focuses on checking the financial information offered by the target company as a means of assessing its underlying performance. The process covers the following areas.

  • Earnings
  • Assets
  • Cash flow
  • Liabilities
  • Management
  • Debt

Again, strategic and financial due diligence are intertwined. If a target company’s assets, debts, earnings, cash flow, and liabilities aren’t what the buyer expects, that company may have to adjust its business plan to align more closely with current market conditions.

Strategizing Due Diligence

Strategizing Due Diligence

In Strategic Due Diligence, the buying company evaluates the market in which the target company exists. For instance, the buyer may interview the other company’s current customers, assess its competitors, and perform a full analysis of the assumptions behind the target company’s current business plan. All due diligence, including the strategic variety, is done to determine whether the business plan can hold up to the market’s realities.

Factors to Consider During Due Diligence

There are two main factors to consider during the strategic due diligence phase of a merger or acquisition. The first step is to determine the commercial viability of the deal, and it involves validating the target company’s financials and potential areas of compatibility. Companies can do this by assessing the target company’s position within the market and by evaluating how it may change with time. Whether the buyer is out of the market or a direct competitor, this analysis is important. However, for competitive buyers, the commercial viability issue can be more complex as it involves a calculation of the combined entity’s competitive position.

As to the second factor, the buyer must determine whether the combined management team can achieve the deal’s targeted value and whether the timeline is realistic. For in-market M&A, it is important that all associated risks in terms of competitive response and culture issues are weighed and managed. If a greater market share is the main value driver of the transaction, leaders should ensure the target company’s executives can meet customers’ needs while evading competitors who will try to win over clients and customers during the transition phase. Although compatibility testing is important during in-market mergers, financial buyers are equally well served by an in-depth analysis that provides a greater understanding of value drivers within the target company.

Using a Virtual Data Room During the Due Diligence Process

Virtual data rooms—also known as VDRs—are online repositories or warehouses where information is distributed and securely stored. This storage and sharing method is primarily designed for mergers and acquisitions and strategic due diligence as well as other applications involving the use of sensitive information. In the context of due diligence, a data room retains all information that is critical to the merger and acquisition process. Data and information related to divisions, units, and companies being bought or sold are stored in the VDR.

All parties participating in the merger or acquisition are allowed to access the information while uninvolved parties are kept out. In the recent past, traditional methods entailed using a physical storage facility—sometimes referred to as a PDR or physical data room—to store documents and information for future distribution. As time has passed and technology has evolved, many companies have transitioned from PDRs to online storage, and the virtual data room has taken center stage.

While it may look easy on television, the merger and acquisition process can be complex. Every business is unique, and all mergers have different circumstances. Anticipating and handling these developments is crucial for ensuring the acquisition is appropriate for both companies. Buyers should continually adapt their strategies and continue to work with experts who can offer solid insights into the firm’s weak areas.

Unternehmensbewertung

Have You Considered These 3 Factors in a Company Valuation ?

There are many ways to arrive at a company valuation.

Popular methods of valuing a company (or business) include reviewing the health of the balance sheet, analysing an accounting measure such as EBITDA or calculating a value based on market share. While purely financial calculations are important, there are other considerations that influence a company valuation.

In this article, we describe three, sometimes overlooked but nevertheless important factors that contribute to a strong business valuation.

  • Long-term contracts with customers
  • Documented processes and procedures
  • Management independence from founder

Also interesting: the role of a dataroom within a company valuation.

Long-term Contracts Point to a Bright Future

Welche Dokumente duerfen mit einem DMS aufbewahrt werden?Businesses, are by their very nature, in a constant state of flux. With pressure from competitors, regulations, logistics, the state of the economy and much more – anything that provides an element of stability is very welcome.

Long-term contracts provide a company with a level of predictable income and security. The importance of winning long-term business cannot be underestimated in a business world defined by constant change.

A long-term contract to supply a product or a service is a strong indicator that company is trusted by their customers. Examples of long-term contracts include recurring consulting fees, ongoing maintenance services, regular repeat orders and rental of property or equipment.

Long-term contracts provide a strong basis for estimating future performance (an important part of a company’s valuation). Sales projections do not have to be based on estimates that could be wildly inaccurate, they are based on signed contractual documents.

With longer term contracts in place company management can plan more accurately. This can lead to greater efficiency and effectiveness of the company. Staff loyalty to the company can increase with greater job security arising from working on predictable, longer term contracts.

When valuing a company, analyse the duration of contracts. The longer the contracts, the greater the commitment of customers to the company and improved stability in earnings.

Process and Procedures – the Unsung Heroes of Business Success

Documented processes and procedures are central to the success of many companies. From fast food restaurants to commercial airlines and from private hospitals to logistics companies. The McDonalds restaurant chain is in many ways defined by the processes and procedures that underpin their business.

Organisations rely on well documented processes to give them a competitive edge in the marketplace. The efficiency they derive from their documented processes is an important part of their valuation.

So how do documented processes and procedures contribute to a company’s value?

  • The processes represent the intellectual property of the company and its understanding of how to run its business. A McDonalds restaurant can server a certain number of people every day based on the processes it uses to cook and serve food. This in turn gives incredibly accurate forecasting of costs and revenue for a given restaurant.
  • Documenting processes provides potential buyers with a clear idea of how the business works. Of course, there may be elements of process that must remain confidential for competitive reasons. However, documentation of process helps a purchaser better understand the business they are purchasing – and perhaps how they can improve efficiency.
  • Adoption of processes and procedures is a sign of a mature mindset within a business. The business has chosen to look for efficiency in their business and ensure their staff follow the procedures.
  • Use of documented processes and procedures means there is less reliance on specific people to do specific jobs. This is critical when people leave the company and so does their knowledge and experience. If this knowledge has been captured in the business processes, the business is at far less risk if a particular individual leaves the organisation.

When analysing a company, assess how much value is derived from their implementation of process and procedure. It may be more than you think.

A Strong and Independent Management

Aufbewahrungsfristen fuer Selbstständige, KleingewerbetreibendeHistory shows that the founder of a company may not be the best person to lead and manage their organisation. The skills and vision required to start a company are not the same as those needed for day-to-day management. Few founders turn out to be great managers.

So, when valuing a company, ensure you clearly understand the relationship between the founder and the management.

For those companies in an early stage of development, the founder may have almost total influence and control, especially if they are responsible for financing the organisation. This may be no bad thing in the early days as the charisma and force of personality of a founder may be critical to the company’s success.

However, an established company should have a management capable of running the business on its own without being reliant on the founder’s direct input. After all, if the founder were to sell the company, the management will no longer have the founder’s input. The management must be strong enough to run the company.

When assessing the quality of management of an organisation, question if they rely heavily on the founder for direction and vision. Ask the question “What is the company valuation if the founder is no longer there?”

In Summary

As discussed in this article, all three factors refer to the relative maturity of a company.

  • Long-term contracts highlight a company whose products and services meet a proven, well-established need and in such a way that customers are willing to commit to longer duration agreements.
  • Adherence to proven processes and procedures shows how a company values its own way of doing things and how that should be documented as part of its DNA.
  • The management team have the experience and independence to manage the company separate from the influence and direction of a founder.

Individually or together these three factors have a dramatic impact on a business valuation and should be considered as part of any valuation process.

business exchange

The Business Exchange Marketplace – A World of Opportunity

Each day, businesses are bought and sold using a business exchange.

Both the sellers and buyers of businesses benefit from having a central place to evaluate potential deals and transactions. This need for a centralised marketplace, alongside an increased use and trust of the Internet, has seen the growth of online business exchanges across the world.

Simply put, a business exchange is an online database of businesses for sale. The database provides basic but important financial and operational information about each business.

Potential purchasers typically have to register with a business exchange to access more detailed information about each business. The database, which may list thousands of companies, can be searched in many ways including industry specific searches, geographical searches and finding businesses with a particular price range.

The types of businesses for sale range from hair salons to car repair workshops to accountants and restaurants – and much more. The focus is on the SME, franchise and start-up sectors. Most exchange websites offer advice, articles and useful information to prospective buyers and sellers to make sure they are fully informed.

It is fair to say the online business exchange has revolutionised the world of buying and selling businesses and is seen as a benefit for the wider business community.

  • Sellers can advertise their business to the widest possible audience.
  • Buyers are given the opportunity to continue or revitalise a business, bring in new ideas and provide jobs for the community.

Let’s investigate how both buyers and sellers benefit.

Business exchange – where business buyers research deals

zwei Menschen besprechen etwasAn exchange is an excellent place for a buyer to begin their research. The buyer can compare similar businesses side-by-side and analyse their comparable values and it helps them understand whether a seller is over-valuing a business.

A business exchange saves buyers time as they do not have to constantly evaluate different publications, adverts and networks to find the right business to buy. They can research and analyse thousands of businesses in a single place.

The business exchange is a perfect place to research an industry or geographic location and receive alerts when new businesses come up for sale. With such a variety of businesses for sale, buyers may also see opportunities they would not otherwise have considered.

If a buyer cannot find a business they are interested in, they are able to place an advert describing the type of business they are looking for. This assists potential sellers identify buyers even before they have put their business up for sale.

It must be remembered that the exchange is a place to start the research. In order to complete full due-diligence on a business purchase, far more information (much of it confidential) is required to fully understand the health and prospects for a business.

Advertise your “business for sale” sign in front of thousands of buyers

A business exchange works just as well for the seller as it does the buyer – but for different reasons.

A seller can advertise their business on an exchange that, by its very nature, attracts a wide selection of serious business buyers. By comparison, an advert in a newspaper or a trade journal may not have the same audience reach and take some time to attract a serious buyer.

The seller does not have to find potential buyers via local business forums, networks or local business brokers with a small client list. In fact, business brokers will often list their clients’ businesses on a business exchange as part of their service.

The exchange provides sellers with feedback if they are just considering selling but not 100% decided on the course of action. By paying a small monthly fee to advertise their business for sale, and restricting the information shown on the website, a business owner can see if there is demand to buy their business at their preferred price. If there are no takers, the advert can be removed and the seller can reconsider their price or sale conditions.

When deciding on a valuation for their business, a seller can compare their business to others in the same sector and can price their business accordingly. A seller gains a better understanding of an achievable sales price by researching other businesses for sale in the same industry.

It is one thing to make the decision to sell but it is another to be ready for prospective buyers to carry out detailed due-diligence on the finances and operations. In this regard, sellers should take professional advice when valuing and selling their business.

Let’s review some of the business exchange websites advertising businesses and franchises for sale.

Businesses for sale – all over the World

The use of a business exchange is understood the world over. However, different countries take different approaches to their implementation.

Germany

In Germany, www.nexxt-change.org is funded by Federal Ministry of Economics and Technology amongst other government organisations and industry associations. With over 8,000 businesses for sale, this is an excellent place for business buyers and sellers to evaluate the marketplace and conduct transactions.

As a general rule for other countries it is an exception for government agencies to be involved in the promotion and administration of a business exchange. However, with over 800 regional partners including credit institutions and economic development agencies, this approach has been highly successful for www.nexxt-change.org.

Other business exchange sites serving the German market include www.dub.de and www.firmenboerse.com.

United States

In the USA, business exchanges are run by commercial business brokers. The brokers take a fee to provide an online platform to bring buyers and sellers together as well as a fee for assisting in the sale process. Let’s have a look at two business broker websites:

Business Broker

The www.businessbroker.net website was established in 1999. The service showcases over 28,000 businesses and franchises for sale and over 150,000 visitors to the website every month.

Business sellers can select from over 1000 business brokers listed in the broker directory on the website. However, a seller does not have to use a broker, they can purchase a listing on the website for between 2 and 6 months which can be renewed as needed.

Business Mart

The www.businessmart.com website describes itself as the “Business Search Engine” has thousands of businesses and franchises listed for sale. Buyers can register with the site for free and sellers can list their company for sale from $20.99 per month.

By way of example, Business Mart have over 1,200 auto-repair businesses listed for sale, over 5,500 cafes and restaurants looking for a new owner and over 130 computer services businesses ready to be purchased.

A Global Exchange

Perhaps the biggest business exchange website is the well-established www.businessesforsale.com. Launched in the mid-1990’s, this website lists over 65,000 businesses for sale in over 25 countries ranging from Germany, France and Italy to Thailand, South Africa and Bulgaria.

The website provides an excellent resource for those buyers interested in overseas businesses and franchises.

All of the websites mentioned above are excellent places to begin research for either the sale or purchase of a business. However, business owners should prepare themselves for the due-diligence process that follows. The activities during due-diligence are far more detailed than the information offered on a business exchange website.

A word about franchises for sale

You will find most business exchanges have a dedicated section for the sale of franchises. The “Businesses for Sale” website has over 30 main categories dedicated to franchises.

The benefits of having a ready-made business system to follow when you buy a franchise is a big attraction for many people.

A business exchange is an excellent place to research the viability of a franchise. You can compare buying a brand new franchise (with the associated drama of setting up a new enterprise) to that of buying an existing franchise operation with their own established customer base.

You may also have the chance to compare the performance of franchise businesses against non-franchise businesses in the same sector or in the same location.

If you are considering buying an existing franchise, be sure to check why the owners are selling their franchise. If it looks like they are not happy with the master franchise operation and do not feel supported, then you may wish to consider other options.

There is another option some start-up businesses choose to access for funding – a newcomer to the world of finance – crowdfunding.

The arrival of Crowdfunding

A more modern development, and one that has most definitely been accelerated by the Internet, is that of business crowdfunding.

Sites such as www.kickstarter.com and www.indiegogo.com attract investors to start-up companies in crowd-funding campaigns. The more interest in a new company, the more money likely to be raised. It is common for investors from many different countries to pledge money.

A notable crowdfunding success is Oculus Rift, a technology company focused on developing a virtual reality headset. In 2012, their Kickstarter campaign raised $2.4 million and in March 2014 Oculus Rift were bought by Facebook for $2 billion.

The start-up team behind the Baubax travel jacket wanted to raise $20,000 via Kickstarter. At last count nearly 45,000 backers had pledged over $9.19 million. It has to be said that this level of fundraising is probably only possible via a crowdfunding platform like Kickstarter.

Crowdfunding can be an excellent funding source for smaller scale projects and businesses at the start-up stage. Each funder is essentially buying into the business through trust and belief in the product or service – although typically they do not receive a share of the business.

At this time, the crowdfunding process has not translated to the purchase or sale of established businesses which require much higher levels of due diligence and funding. For the foreseeable future the business exchange will be the preferred sales route for existing business owners.

A seller of a business finds a buyer – what next?

It is easy to see how business sellers find potential buyers via a business exchange website. However, the success of a business sale depends on how ready both the buyer and seller are to complete the sales transaction.

It is necessary for the buyer to carry out due-diligence in many areas including legal, tax, finances, environmental, insurance, technology and personnel. This will include working with legal, financial and business experts to properly assess the business opportunity.

It is also necessary for the seller to provide all the required documentation in a safe, secure manner that is fair and equal to all prospective buyers. This can be achieved online with specialist “data room” software designed to give secure access to confidential information online. Many sellers do not realise how important it is to the success of a sale that information needs to be organised and presented clearly for all potential purchasers. Using a data room will solve this problem.

 

In summary, the business exchange is one of the very best ways business buyers can find their next opportunity – wherever it is in the world.

Letter Of Intent

Letter of Intent: A Vital Tool in the Formal Negotiation Process

Business transactions tend to be surrounded by a number of questions and concerns, particularly in the case of mergers and acquisitions. Either party involved would be remiss to jump headlong into such a situation without some level of planning and negotiation. At the same time, neither wants to be legally bound to the other party’s terms before having a chance to voice an opinion on the conditions of the transaction. This is where a Letter of Intent comes into play.

What is a Letter of Intent?

As the title indicates, a Letter of Intent essentially states the intentions of the acquiring firm as they apply to the target company. Via this type of document, the former clues in the latter regarding plans for the deal in question. This could be considered a middle ground between the concept stage of a merger or acquisition and finalization.

Recipients of the document may agree with the terms provided, counter with an edited version or respond with a different set of conditions entirely.

Which Items Should a Letter of Intent Contain?

First off, the presenting firm should provide a brief introduction in a conventional Letter of Intent pinpointing both companies to be involved. This would be followed by information pertaining to the previously-mentioned terms and conditions of the transaction. This type of declaration should likewise dictate a time frame in which the deal is expected to be completed as well as any requirements applying to the financial aspects of the agreement.

A list of the assets and liabilities to be included in the transaction should be documented as well. Depending on the type of company to be purchased or taken over, certain clauses may also need to be included regarding current employees. These fall into the category of special warranties. Such statements are defined as conditional elements of an agreement.

How Does an LOI Differ from a Memorandum of Understanding and a Contract?

The key difference of these components is the extent to which each is legally binding. A Letter of Intent is generally not considered legally binding as it is part of the negotiation process and precedes the memorandum of understanding and the final contract. That being said, inclusion of certain binding elements in a Letter of Intent is advised, such as:

  • Non-Disclosure Agreements: Stipulations identifying details to be kept confidential throughout the course of the transaction. While each party involved has a right to obtain information about the other, neither is allowed to share these findings with parties not included in the transaction.
  • Non-Compete Agreements: In many cases, both the acquiring and target firms will agree to refrain from attempting to acquire the other’s current clientele or employees.
    Those are only two of the most common legally binding clauses stipulated in a Letter of Intent. Some may also include agreements promising reimbursement of relevant costs in the event the transaction is not completed.

When these types of statements are incorporated in an agreement, they need to be clearly identified and specified as such. The target firm has a legal right to agree or disagree with each point covered in this document and request changes as deemed fit.

Once both agree to all terms and conditions set forth, a memorandum of understanding will be drawn up followed by the final contract, each of which will be legally binding.

Why is an LOI Important in Mergers and Acquisitions?

A Letter of Intent is designed to formalize and foster business negotiation processes while offering both parties a certain degree of protection. Though terms and conditions should be outlined in this type of document, legal advisors caution against the inclusion of excessive details. Doing so could negate the overall purpose of the LOI, rendering it a legally binding agreement in court.

In short, LOI’s should succinctly describe the presenting firm, its target company, overall intentions with the merger or acquisition, financial expectations, the period of time in which the transaction is expected to be completed and conditional aspects. It is not a legally binding document though certain restrictive clauses may be included.

A Letter of Intent is a tool meant to protect the rights of those involved and allow each firm a voice in the process. Once an agreement is reached, the parties will proceed to a legally binding memorandum of understanding and, ultimately, a final contract.

Document Management System Due Diligence

How to Use a Document Management System for Due Diligence

An online Document Management System (DMS) is a repository of documents that can be organised to suit the needs of an organisation.

A DMS is often used to replace the paper-based filing of an organisation and lends itself very well to being used for time-limited due diligence projects.

A DMS is typically used by the seller of a company to organise all the public and confidential information required by a purchaser to complete their due diligence.

How does a Document Management System help?

A DMS provides a number of clear advantages over paper-based filing.

An online DMS provides a single place to store and access information for both sellers and buyers. This removes the problem of paper-based documents being stored in different locations and possibly being lost or misfiled. Storing the information in digital format helps speed up the due diligence process.

The information held in the DMS is only accessible by those who have been assigned a user ID. This ensures the security and confidentiality of the due diligence process. Particular information can be made available to specific individuals. For instance; access to sensitive financial data may be given to a senior executives involved in a transaction but not made available to general staff.

A DMS offers fast searching of information – text searches across all files can be quickly entered. There is no more laborious trawling through paper-based files to locate information.

An online DMS can be setup within a matter of hours and documents can be uploaded right away to be available for review. This is considerably quicker and more cost effective than setting up a secure data room in an office.

Collect and organise your documents

Before a seller sets up their online DMS, they need collect all the information required for the due diligence process. This will most likely be a combination of paper based and electronic documents.

It is recommended all paper documents are scanned and saved in a common format such as PDF. Wherever possible, the text of the document should be searchable (this may require paper documents to be scanned by Optical Character Recognition (OCR) software to identify the text on each page.

Draw up a list of the main categories of documents for due diligence. This will assist the filing and searching of information. Use a clear and consistent method to name all your documents.

Managing your documents during Due Diligence

During the due diligence process, the seller will be responsible for managing all the documents for all the prospective purchasers.

User IDs have to be assigned to each purchaser and the correct level of access to document given. Some documents, because of their confidential nature, will only be made available to some users.

Any new documents must be uploaded to the DMS and purchasers advised of the document’s location.

If at any point a purchaser does not wish to proceed, the seller can immediately revoke their user ID and prohibit access to the information in the DMS.

 

For many organisations, an online Document Management System is the ideal technology to support the due diligence process. It offers ease of use, setup and management at a cost much lower than organising a dedicate data room to store information.

Docurex is the preferred DMS of many companies who require secure access to their confidential digital documents.

CC Flazingo Photos Flickr

The Vital Role of Due Diligence

Information is key to the business world.

The due diligence process is the way by which businesses can accumulate the necessary information to make the best investment decisions.

The world of business has always rewarded the individuals and companies that carry out thorough due diligence on their transactions. Whether it is to buy a property, acquire a business or launch a company on the stock exchange – success has most often gone to those with the most facts and who are able to make the best informed decisions.

So what is due diligence and what must both seller and buyer consider during the process? In this article we will look at due diligence from the perspective of both sellers and buyers.

What is Due Diligence?

Let’s define “due diligence”. Investopedia states the following:

“Due diligence (DD) is an investigation or audit of a potential investment. Due diligence serves to confirm all material facts in regards to a sale.

Generally, due diligence refers to the care a reasonable person should take before entering into an agreement or a transaction with another party.”
In the business world there are many occasions when it is essential to investigate a potential transaction in the most thorough way possible before proceeding. Due diligence allows a business to confirm the facts of a situation in order to make an informed decision.

The term due diligence has particular relevance and use in industries such as real estate, mergers and acquisitions and Initial Public Offerings (IPO’s) of companies.

Due diligence is undertaken to assess risk and opportunity. The process itself is meant to be non-judgemental but to provide objective information on which a decision can be made. Discover more about the world of due diligence in this article.

The Main Types of Mergers and Acquisitions

Due Diligence in Mergers and AcquisitionsAny company merger or acquisition will rely heavily on the due diligence process.

Some might say it the most critical process as it provides the raw information for the decision to proceed or call a halt. It is important to understand the difference between a merger and an acquisition.

A merger is an agreed joining of two organisations, usually as equals but with each company bringing different strengths. A merger is seen as a friendly and co-operative exercise.

An acquisition can either be friendly or hostile.

A friendly acquisition is where one company buys another outright. There are many cases of this happening where a company such as Microsoft or Apple will acquire a smaller company for some specific technology or expertise. The smaller company is swallowed by the bigger one and disappears from the marketplace.

A hostile acquisition takes many forms but will typically involve the company to be purchased recommending that their shareholders do not accept an offer. This can be a negotiating tactic in order to achieve a higher price for a sale.

In any merger or acquisition transaction it is critical that the purchasing company has conducted thorough and full due diligence on their target purchase. The information gained will form the basis of a price they are prepared to pay for the target company.

It is critical that all aspects of a company are fully understood before an offer is made.

Click here to learn about other types of merger and acquisition such as vertical, horizontal and conglomerate.

When is the right time to sell your business?

Wann sollen Sie Ihr unternehmen verkaufen? Frau mit SmartwatchWhile each business sale is unique, there are common themes for why business owners choose to sell their business.

Retirement Planning

Many owners of small and medium sized businesses reach a point where they consider selling their business as part of their transition to retirement. They no longer wish to work the hours required to run a business and are looking for a way to realise the value that is locked within their business.

New investment

Businesses large and small all require a level of investment to continue to be viable. Whether it is in machinery, stock, staff, advertising or operating funds, all businesses thrive on new investment. One of the recognised ways of finding new investment is to sell a business to an organisation that has the funds to invest.

Change in the market

All industries are evolving and changing. The business practices that worked 2 years ago may be obsolete tomorrow. Margins that were high last year may be razor thin this year. These changing conditions may affect how current owners view the future potential of a business. It may require a new owner to bring in new skills or funding to address the changes in the market.

No matter the reason for selling your business, ensure you have all your facts organised, prepared and available for potential purchasers to review.

Click here to discover more reasons for why business owners choose to sell.

How to prepare for due diligence when selling a business

If you are considering selling your business, you will need to prepare for the due diligence process. While it is the responsibility of the purchaser to ask all the questions it is necessary for the seller to be able to answer them.

A seller who is prepared and organised will have a much better chance to sell their business. Quick answers, clear documentation and easy access to information are all the responsibility of the seller if they wish to assist the fact finding process.

A seller should take these important steps:

  • Place all the documents in one central location that is accessible by all potential purchasers
  • Assigned User IDs to restrict access to only the necessary information
  • Organise information in clear, logical categories.
  • Scan all relevant documents for easy electronic access.

A seller has to undertake a considerable amount of work to prepare for a sale. However, the more work that is completed up front will result in a quicker and more efficient due diligence process.

Find out more on how to gather, organise and store information as part of the sale of a business.

If you are buying a company are you taking these due diligence steps?

So while a seller is gathering all the relevant information relating to a sale, it is important for a purchaser to have an extensive list of questions. A detailed and methodical approach is necessary to ensure all the important questions have been asked.

There are many factors to consider when you analyse a company you plan to purchase.

Some of the key indicators you need to study include:

  • Capitalisation
  • Revenue, Profit and Margin
  • Valuation multiples
  • Industries and competition – who are the main competitors within the industry?
  • Ownership structure – who are the owners, what are their rights and obligations?

Of course, there are many more aspects that need to be covered including legal, environmental and staffing questions. Click here to discover more about this topic.

How to use a Document Management System (DMS) for Due Diligence

diagramm-unternehmensankauf-due-diligenceA common requirement of both the sellers and purchasers of an asset is the need for easy access to the information involved in a transaction. The quicker information can be shared; the quicker decisions can be made.

An Online Document Management System (DMS) is a popular solution for sharing information as it provides secure, structured, centralised storage of data that can be accessed by all parties.

It is the seller of an asset or company who will typically setup an online DMS to support the due diligence process. The seller should consider evaluating and setting up the DMS prior to the transaction so that they have the administration of data and user access already organised before engaging with potential purchasers.

The setup of an online DMS is an extremely simple process. Once an account is confirmed, extensive online help and an easy to use interface make the DMS simple to use.

Once the DMS is configured, information can be uploaded to the DMS into the relevant folders for easy searching and review.

Click here to find out more on how to use a DMS as part of a due diligence process.

In summary, due diligence is an essential process for large scale business transactions – from real estate to company mergers.

The process is critical to both sellers and buyers. Sellers must have a means by which to present all the required information to allow a transaction happen and purchasers need a means to confirm all the facts before making a decision.

An online Document Management System is seen as the best solution to meet the needs of both parties. Sellers have an easy to administrate system that helps them organise and protect their data and buyers have a single online location to analyse and review documents for a transaction.

“Handshake – Two men” by Flazingo Photos is licensed under CC BY 4.0

due diligence steps

If you are Buying a Company are you taking these Due Diligence Steps?

If you plan to buy a company, the due diligence process is probably the most important aspect of the entire transaction.

Due diligence research and analysis ensures a buyer is confident in the true value of the company and how this relates to the price of the company for sale.

Below are the major elements that should be studied during the due diligence process:

Company capitalization

How much is the company worth in today’s market place? Are shares publicly available and if so, which stock exchange do they trade on?

Revenue, Profit and Margin

What are the company’s figures for at least the last three years? Get information from earlier years if possible.

Has revenue grown year on year? Are profits steady or sporadic? Are profit margins consistent with the industry norm? These are just some of the questions which will be asked during the due diligence process.

Industries and Competition

In what industry (or industries) does the company compete? What are the major trends in these industries? Are there threats or opportunities in these industries arising from new regulations, legal class actions, new technology or new competition?

What is the market position (Leader? Follower?) of the company and how do they compare to their major competitors? What are the dominant business models used by the competition and how well does the company execute this model?

Valuation Multiples

Given the price being asked for the company, what is the valuation multiple and how does it compare to the industry average? If there is a large difference between the price being asked and the valuation multiple of the competition, what is the reason? Is it justified?

Ownership and Management

Who actually owns the company? Do the founders still hold stock? Is it a family run business? What is the percentage of shares held by founders and current management? This helps show how much they have invested in the success of the company.

Examination of Balance Sheet

Use a financial expert to help analyse the balance sheet. Understand the assets, liabilities, cash flow position, debt levels and other key indicators to the financial health of the company.

Stock History, Options and Dilution

How has the stock price performed over the last 10 years? How does the market perceive the company and how is this reflected in the stock price?

Do current stock owners have options to sell stock? Is the company committed to issuing more stock in the near future?

Risks to the Company

Are there any specific risks, legal cases, regulatory concerns or competition issues that threaten the company? Consider all aspects of the business.

 

Something to remember as part of due diligence is that in the first instance it is simply an information gathering exercise and not one that requires any judgements to be made. Keep an objective mind to the information collected and undertake a full analysis when you have collected all the data you need.

Completing a full due diligence process will ensure you have the best possible understanding of a company’s potential.

We recommend you download a free due diligence checklist from www.due-diligence-checklist.net to ensure you have asked all the questions above (and more).

The 8 key reports you must make available to potential buyers of your business

The 8 key reports you must make available to potential buyers of your business

If you are looking to sell your business or are acting on behalf of a business owner who wishes to sell, you no doubt understand the importance of the correct disclosure of your company information.
The due diligence process offers buyers the opportunity to review documents and ask relevant questions of the current business owner. This gives buyers the complete picture of the business they are looking to buy and ensures the seller meets all disclosure obligations from a financial and legal perspective.
The more company information a business owner can present in the first instance, the quicker the sale process is likely to become.
Buyers will see less risk in the purchase if they have their questions answered before they have even thought to ask them.
So what is a proven way to organise your company information during the due diligence phase of a business sale?
In our experience, we have found the following 8 key reports to be critical in helping describe the company for sale and answer any questions buyers may have.

The 8 Key reports

  1. Legal Situation
    Seen as the foundation report for all other reports. Establishes the legal entity(s) involved in the transaction, contracts, key legal documents, outstanding or impending litigation and other legal matters.
  2. Tax Situation
    Tax returns, tax audits and current and future tax liabilities.
  3. Financial report
    Provide the last 3-5 years financial information, a complete breakdown of the company’s balance sheet, audit reports, financial planning for next 12 months and more.
  4. Market, Industry and Strategy
    Overview of the market in which the company operates. Economic, industry factors affecting the business – positive and negative. How is the company differentiated from competitors? What is the marketing strategy? Sales pipeline.
  5. Environmental
    Are there environmental impacts on the company? Are there environmental obligations?
  6. Insurance Coverage
    Confirms the types and level of insurance in place. Confirms any claims made on insurance policies.
  7. Technology
    What is the technology used by the company to manufacture/create/deliver its product or service? What is the technology used to support the administration of the business?
  8. Employees
    This is a human resources report. An overview of employees, their roles and positions in the company. Includes level of experience within the company, pay levels and achievements.

These 8 reports outline a wide selection of documents that need to be presented, most likely to multiple buyers, as part of the due diligence process.
The storing of critical documents must be done in such a way as to give each potential buyer an equal opportunity to review the company information and ask any due diligence questions.
The security, confidentiality and access to these documents must be tightly controlled through the due diligence process.
The docurex cloud based “dataroom” is a popular solution that helps the seller organise and control access to confidential information as part of the business sale.

CC Steve Wilson Flickr - Due Diligence

Discover the Importance of Due Diligence

The business world relies on the due diligence process on such a regular basis that it is often taken for granted.

However, it is worth reminding ourselves of the important role due diligence plays and how it helps companies make well informed decisions.

A Definition of Due Diligence

The term “Due Diligence” is used in business to describe to the process by which a purchaser will collect information and analyse a transaction before agreeing to or rejecting the deal.

The more thorough the due diligence carried out by a purchaser, the greater the chance they have of making a correct assessment of a transaction.

The following excellent explanation of the purpose of due diligence comes from www.investinganswers.com.

“Due diligence helps people and companies understand the nature of an investment, the risks of an investment, and how (or whether) an investment fits into a particular portfolio. Due diligence isn’t just good sense, it’s a duty investors owe to themselves — doing this sort of “homework” on a potential investment is often essential to making prudent investment decisions.”

The Facts Come First

The purpose of the due diligence process is to collect facts and information.

In the first instance it is not meant to generate immediate conclusions or opinions. Due diligence should be focused on gathering the facts and nothing but the facts of a particular situation.

It is typically up to the purchaser in a transaction to determine the information they need to make an informed decision. The purchaser must then present the requests for information and the seller will then collate the information and present their response.

Once all the facts have been gathered it is then possible for the relevant experts and professionals to analyse the data to assess the viability of the transaction. The quantity and quality of relevant and timely information that is gathered will directly affect the quality of the analysis of a deal.

Assessment of Risk and Opportunity

Every business transaction has an element of risk and an element of opportunity.

It is the duty of a purchaser to discover as much as possible about a particular transaction to identify those risks and opportunities.

For example: When buying a company, the purchaser must understand the level of obligations the company has – payroll, creditors, contracts, debts, legal, regulatory and environmental to name a few. Without a clear picture of these obligations a purchaser will not fully understand the risk they are accepting in buying the company.

On the other hand, there are opportunities to be identified as a result of the due diligence process. These opportunities include Information on regulatory changes that may give the company a new advantage in the marketplace, a new product may be in development but not yet announced or the introduction in new technology may dramatically reduce costs and increase margins.

It is important a purchaser uses the appropriate experts and professionals such as accountants and lawyers to assess both the risk and opportunity.

In summary, due diligence is the vital process by which companies gather and then analyse information about a transaction so they can make an informed decision.

The upfront effort placed into due diligence will potentially save or make millions of euros for a company. Company executives ignore due diligence at their peril.