It’s always valuable to know what the other side is thinking. BDO Seidman, the nation’s #6 accounting firm, does a large number of due diligence reviews of companies for financial buyers. Their most recent newsletter to private equity clients gives BDO’s view of what they are going to look at before they give their clients the green light to close a deal – Six Keys to a Successful Deal
Whether you are getting ready to sell your company in the near term, or are planning for it a couple years down the road, today is the time to understand these issues and start working on making these areas look really good to prospective buyers.
This is what BDO is telling their clients (the fancy language and big words are theirs, not mine):
Look Forward While Looking Back.
Whereas previously a buyer could credibly base future earnings on past performance, economic conditions require buyers to take a more holistic approach to assessing the viability of the seller. If drastic operational cuts have been made, these need to be substantiated to ensure they’re sustainable for the long-term. Externally, greater emphasis must be placed on the diligence of the health of business constituents, such as vendors and business partners.
Now more than ever, buyers must understand the cash generating abilities of a business. Watch out for sellers who may have underinvested in, or even deferred, key expenditures because this could mean that it will take more than just the initial investment to move the business forward.
Determine What’s “Real” In The Business.
Some key questions to ask include: How are the management team and the business responding to the current economic environment? How lean is the manufacturing or operating processes? How old is the equipment? What is the role of each employee and are their opportunities to streamline? While the seller’s numbers may be all over the place, the fundamentals of the business live outside the virtual data room.
Mind The GAAP.
Pressures to achieve results – or dress up the company for sale – may have influenced the company’s accounting decisions and the resulting numbers. Pay particular attention to estimates and judgments, specifically any changes in methodology. Accounting estimates – such as bad debt reserves, net realizable value of inventory, and other contingencies – should be analyzed as the company engages in the challenges of today’s market.
Take Due Diligence One Step Further.
Background checks on key individuals play a major role in the hiring practices of many corporations. But this is one step that is often overlooked in the acquisition decision process. Investigative due diligence ensures that buyers are aware of any factors likely to influence the behavior of a seller or retained management team.
If you have questions about the thinking behind these statements, or want to talk about how they would apply to your specific company, give your local CFA office a call. One of our Managing Directors would pleased to talk with you.
posted by John Hammett
John Hammett is Managing Director of CFA’s Minneapolis office. He closed a deal in late 2009 where BDO Seidman was retained by the buyer to do the due diligence.