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Commercial Due-Diligence – It Reveals a Great Deal

Posted On : Nov-25-2009 | seen (506) times | Article Word Count : 824 |

Due diligence should be forward-looking, putting the broader strategic and commercial logic under the microscope, assessing operations objectively, without bias or overconfidence, gauging risk, testing assumptions and questioning beliefs.
No one purposely invests in a deal expecting it to disappoint, but it happens - over 60% of acquisitions fail to meet expectations. In the wake of so many disappointing transactions there are probably few better investments in time and money than in the careful and creative analysis of a target merger or acquisition. Commercial due diligence shifts the odds of a successful outcome in the purchaser’s favour, markedly increasing the chances of a deal becoming a winner. It can unearth those gems that turn an otherwise average deal into an outstanding one, as well as finding the smoking gun! Information it uncovers gives a detailed picture of a deal’s risks and probable outcomes, leading to a more robust, lower risk investment decision.

Perhaps because deal making is glamorous and due-diligence is not, too often the process seems to concentrate on verifying the target’s financial statements rather than focusing on the strategic logic of the deal, and the ability to derive significant value from it. Removing window dressing and accounting tricks to reveal the underlying reality is vital, but only exposes a historical perspective. Due diligence should be forward-looking, putting the broader strategic and commercial logic under the microscope, assessing operations objectively, without bias or overconfidence, gauging risk, testing assumptions and questioning beliefs.

Rigorously carried out, due diligence identifies risks and uncovers potential liabilities before it is too late to do something about them; it ensures that there are no “downstream surprises”; it facilitates a streamlined and effective launch of the integration planning process.

Commercial due diligence should answer four fundamental questions:

What are you really buying?
What is your target’s stand-alone value?
Where are the synergies - and the skeletons?
What should be your walk-away price?

Deals should be viewed from an operational and performance standpoint, as well as analysing a business’s financial aspects. Due diligence should look at a business case in its entirety, probing for strengths and weaknesses, searching for unreliable assumptions and other flaws. This enables more informed decision making, so that buyers are more aware of the nature of the transaction and can focus on the critical areas of performance and profit improvement immediately upon completion.

An acquisition is never limited to a P&L and Balance Sheet, so management, production, technological, commercial and other capabilities need to be assessed in detail, to establish what definable value they deliver. These factors can create significant risk if taken for granted, as it is their quality that often determines the outcome of a deal.

By getting to grips with the competitive pressures in the target’s markets, commercial due diligence generates a picture of market dynamics, profitability and costs, asking the hard questions that some prefer to ignore. Although the analysis of a deal relies upon data provided by the target, it should not be accepted at face value; independent field research should always be conducted to validate that data, getting to know the target’s customers, checking out the competition and verifying costs.

Judging by the number of failed deals, due diligence seldom leads prospective purchasers to walk away, even when the logic behind them is flawed. Too often, if the basics of a business are unattractive relative to the price, people look for synergies to justify the deal. Determining what synergies an acquisition can deliver is tough. Cost savings and revenue enhancement are often overstated, and the difficulties in achieving them underestimated. It is crucial to differentiate between various kinds of synergy, assessing the probability of achieving them, time taken to deliver them, and investment that may be necessary to realise them.

Although synergies - especially the elusive ones  are something to target in managing a completed acquisition, they should not unduly influence the negotiation of the deal unless there is a fair degree of certainty about the numbers.

Experience shows that once a deal gathers momentum, it’s hard to apply the brakes, so it is important to establish a “walk-away” price which excludes synergies with a low probability of being achieved, or where the time scale for realising them is long; because the bulk of the price paid should reflect the business as it is, not as it might be, it is important to value a business as a stand-alone concern.

Integration planning  and the costs of integration  are among the biggest determinants of an acquisition's ultimate success or failure, so a due diligence process is never really complete until those costs have been closely scrutinised, and potential challenges to a smooth assimilation evaluated. This aspect of pre-deal assessment must be treated with as much discipline and structure as any other component of due diligence.

Detailed due diligence is vital to a successful merger or acquisition, not a burdensome task to be dismissed lightly.

Put it another way, in the words of an old adage, “marry in haste, repent at leisure”.

Article Source : Due-Diligence – It Reveals a Great Deal_4548.aspx

Author Resource :

Dartnell : Planning a Business

Keywords : planning a business, business planning services,

Category : Business : Management

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