If you look at a due diligence check list, you’ll commonly find 3-5-year financial statements, employment agreements, leasing contracts, and past litigation on the list. While reviewing these documents is important, they only reveal part of the picture because they focus heavily on past performance.
Thorough due diligence involves both looking backward and forward and should also consider how the two companies will operate together and what future issues (or opportunities) may arise as a result of the combination.
Take the example of HP purchasing Autonomy for $11.1 billion, which is viewed as one of the biggest due diligence blunders in recent history. In reviewing the company’s past performance, everything seemed to check out. Unfortunately, HP did not consider future ramifications and failed to notice that Automony’s software was becoming obsolete. Just days after completing the transaction HP was forced to write down a loss of $8.8 billion because of the acquisition.
Another example we see far too often is buyers not properly thinking through who will run the company after the transaction closes. In privately held transactions very often the owner IS the company. So, if there’s no plan of action to have him or her stay on, you will be losing the value of the company once the acquisition is completed. If there are key players such as the owner or other employees who are essential for running the business, make sure you have employee agreements in place or a plan where the owner stays on for some time post-closing to transition the business over to new leadership.
You don’t need complex calculations or specialized industry knowledge to figure out if a product will become obsolete or if key employees are critical to the business, but it does require an extra forward-thinking step. During due diligence, don’t become so caught up in reviewing the past details that you miss out on the big picture: the future of the company after the acquisition closes. Make sure to pay attention to the “common sense” outlook of the company like expected product lifecycle and key employees in order to increase your chances for success long term.
Learn more about due diligence in our upcoming webinar “A New Look at Due Diligence.”
Date: May 30, 2019
Time: 1:00 PM EDT