Common Mistakes Made by Buyers During Due Diligence
July 4, 2011 | Insider Tips, Media
The treacherous course of due diligence, as part of the buying process, is fraught with booby traps. As a former corporate legal counsel, I can tell you that more business decisions are made from the gut than from an informed and calculated business perspective. Even the best of deals involve some level of emotion (“Listen, I really want this deal to work!”). But having a road map on which to execute your due diligence can help you navigate through the buying process and arrive safely at a wise business decision.
Authors Andrew Sherman and William M. Crilly provide a great road map in The AMA Handbook of Due Diligence: Revised and Updated Edition — filled with nearly 400 customizable forms and templates for recording and analyzing every possible operation or financial activity at any organization.
The AMA Handbook of Due Diligence
The Law Insider featured article from author Andrew Sherman
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Common Mistakes Made by Buyers During Due Diligence
By Andrew J. Sherman,
Author of The AMA Handbook of Due Diligence
1. Mismatch between the documents provided by the seller and the skills of the buyer’s review team. It may be the case that the seller has particularly complex financial statements or highly technical reports which must be truly understood by the buyer’s due diligence team. Make sure there is a capability fit.
2. Poor communication and misunderstandings. The communications should be open and clear between the teams of the buyer and the seller. The process must be well orchestrated.
3. Lack of planning and focus in the preparation of the due diligence questionnaires and in the interviews with the seller’s team. The focus must be on asking the right questions, not just a lot of questions. Seller’s will resent wasteful “fishing expeditions” when the buyer’s team is unfocused.
4. Inadequate time devoted to tax and financial matters. The buyer’s (and seller’s) CFO and CPA must play an integral part in the due diligence process in order to gather data on past financial performance and tax reporting, unusual financial events or disturbing trends or inefficiencies.
5. Lack of reasonable accommodations and support for the buyer’s due diligence team. The buyer must insist that its team will be treated like welcome guests, not enemies from the IRS! Many times buyer’s counsel is sent to a dark room in the corner of the building to inspect documents without coffee, windows or phones. It will enhance and expedite the transaction if the seller provides reasonable accommodations and support for the buyer’s due diligence team.
6. Ignoring the real story behind the numbers. The buyer and its team must dig deep into the financial data and test (and retest) the value proposition as to whether the deal truly makes sense. They must ask themselves, “Does the real value truly justify the price?” The economics of the deal may not hold water once a realistic look at cost allocation, inventory turnover, and capacity utilization is taken into account.
Excerpted from The AMA Handbook of Due Diligence by William M. Crilly and Andrew J. Sherman. Copyright © 2010 William M. Crilly and Andrew J. Sherman. Published by AMACOM Books, a division of American Management Association, New York, NY. Used with permission. All rights reserved. http://www.amacombooks.org.
Author Bios
Andrew J. Sherman, is the author of several books, including The AMA Handbook of Due Diligence, Harvesting Intangible Assets, Mergers and Acquisitions from A to Z, Raising Capital, and Franchising and Licensing. He is a partner in the Washington, D.C. office of Jones Day and a top-rated Adjunct Professor in the MBA and Executive MBA programs at the University of Maryland. An internationally recognized authority on the legal and strategic aspects of business growth, he is frequently called upon by the media to share his expertise. He has been featured or quoted in The Wall Street Journal, USA Today, The New York Times, BusinessWeek, Fortune, Investor’s Business Daily, Forbes, Entrepreneur, U.S. News & World Report, and other prestigious publications.
For more information please visit http://amacombooks.org/
