Doing "Due Diligence"
Whether it's multi million or billion dollar merger of public companies like the recent Arby's - Wendy's merger here in Columbus or the stock/asset sale of a large or small privately held company, a crucial part of the transaction is completion of "due diligence." So what is "due diligence" and why does it matter?
Due diligence is about making sure that you really are buying what you think you are. It can be invaluable in uncovering defects which may be deal killers or at least require remediation before closing or a restructuring of the economics of the transaction, It can also be useful in gaining useful information about the overall strengths and weaknesses of the company that you will need once you are in charge of operating the business.
Without "due diligence", a buyer may discover too late that the facilities require enormous capital expenditures to compensate for deferred maintenance. Perhaps the largest customer is very unhappy and in the process of moving its business to another company. The accounts receivable may be well past due and even uncollectible.
In larger transactions, "due diligence" can take months, be extremely costly and involve professionals of many kinds (including attorneys and CPAs). When smaller privately held companies are involved, the process is less complicated, but should not be ignored entirely. For a helpful rundown of what "due diligence" is all about and the process, visit this FAQ.
Every company being acquired and every industry is different so different things will be important in any particular "due diligence" process. However, for a nice overview of the sorts of tgenerally applicable things you should ask about when doing "due diligence", visit "What Does 'Due Diligence' Mean When Buying a Business?" There are also many many good due diligence checklists available on the web. Some of the most important things you should be interested in finding out should include:
- Security Interests and liens on the assets being purchased
- Unresolved pending or threatened litigation
- Financial health of the company, including collectibility of accounts receivable
- Identification of the key assets essential to the continued operation of ongoing business being purchased
- Current employee benefits and policies
- Quality of relationships with customers, vendors, and suppliers
- Condition of equipment and facilities
- Agreements among owners relevant to the purchase
- Saleability of inventory
..... And now I get to go home and see if the electricity knocked out yesterday afternoon by the ferocious wind storm remains of Ike has come on yet. According to the news reports, 2 million people in Ohio are without power and almost 60% of those of us living here in Central Ohio lack electricity. Some estimates are that it may take up to a week to get it all back on. Thankfully, my hot water heater runs on gas so at least there'll be no cold showers.
UPDATE: Click here for a very basic checklist for doing "due dilgience".
