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How do I uncover what the Seller doesn’t want me to know?

by on November 14, 2013

DetectiveYou’ve found an interesting target company to buy.  You’ve had discussions, are in the same range in terms of price, you may even have a Letter of Interest or a Memorandum of Understanding in place.  Now it’s time for some serious due diligence.

So you have the Due Diligence Checklist from you lawyer or legal department.  This lists all of the documents you require for your analysis, like financial statements, pending litigation, and organizational charts.  You’re all set, right?  The information they provide will tell you everything you need to know for you to decide if it’s actually worth buying this company, right?  Yet something’s nagging at you.  You’re wondering, “What more do I need to know, especially what don’t they want me to know?”

The responses you’ll get to your due diligence checklist are necessary but that information won’t tell you what you really need to know to make your decision whether or not to buy this company you’re looking at.

The Point of Due Diligence

Everyone knows you have to do due diligence in the M&A process, if you’re buying or selling a company.  But what does that mean, what’s the point?  The easy, and wrong, answer is to find the problems in the company you’re looking at.  This will only tell you if you should NOT do a deal.  But that perspective, of looking for problems, will not tell you if you SHOULD do a deal.

I’m not saying you shouldn’t look for problems.  In fact, it’s crucial that you do, particularly in the financial and legal areas.  Financial and legal due diligence are focused on determining the potential value of a deal and concern buying the company “at the right price”.

Forward-Looking Due Diligence

What I am saying is that the due diligence needs to do more than look for problems.  It also needs to focus on the combination itself.  It’s called “Forward-Looking Due Diligence”.  Forward-Looking due diligence explores whether the potential of the combination — however enticing — is realistic.

Okay, you probably think this is obvious.  That no one enters into any M&A deal that they didn’t think made sense, that was commercially attractive, or that they didn’t think would generate the returns they expected.  Yet it happens all the time.  Why?

Those that fail are often blamed on the economy, integration issues, or cultural issues. And all of those can be factors.  However, quite often what is really behind the failure of these transactions is a result of a disconnect between reality, expectations, and internal politics.

The reality of a situation is obtained through careful and thorough due diligence, self-examination and market knowledge. Expectations are created by what we want to see, often when we’ve committed a lot of time and energy to a particular transaction and we feel compelled to find a way to do a deal.

Politics often cloud reality and create unreal expectations. It’s very difficult to tell a superior that his or her vision is incorrect, that this particular transaction should not be completed, or that the deal should not go forward. Often this occurs because of fears that the superior will blame the messenger for not doing a good job or for not having the same vision.

You need trust and openness among all team members and an attitude of always challenging your assumptions to make sure all of the issues are thoroughly addressed up front, that the risks are clearly understood, and that a smooth transition occurs after the deal is struck, because once the deal is done the real work begins.  As the CEO, people look to you to create an environment where someone can feel comfortable telling you that the deal should not go forward.  Using an intermediary, an objective third party, to act as a buffer can allow other team members to express their thoughts and concerns without fear and providing a more thorough and complete assessment of the opportunity.

FREE Paper

If you are currently exploring an acquisition, maybe you’ve identified a company that seems interesting, or maybe you’re thinking you might look at some opportunities to acquire some technology in the next 3-9 months, I invite you to download the FREE paper and find out how to uncover what the seller doesn’t want you to know.

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