You have worked incredibly hard building your software company. Now someone recognizes your value and is considering an acquisition.
Your prospective buyers will conduct due diligence. That much should be expected.
But how deep will they go?
That depends on the buyer, but most companies undertake significant due diligence processes, and some people find themselves surprised by the depth of the investigation.
Many people assume that the due diligence process is simply a financial exercise – “opening the books” to investigate the company’s cash flow, debt, and profit situation.
A proper due diligence process is much more than that.
Due diligence is about informing the decision for a potential acquisition. A meaningful process explores every aspect of your company’s past, present, and future.
Due Diligence Areas
The financial records will naturally be a key part of a due diligence process. You should expect that the financial and accounting review will encompass all financial statements, projections and forecasts, operating budgets, and audit papers.
But proper due diligence goes further. A comprehensive process will also delve into other areas and ask key questions, such as the ones listed below.
- Is there a strategic fit between the two organizations?
- Can their strategic and operational plans be integrated?
- Is there a planning process in place, with follow-up on implementation?
- What about tracking of performance against goals and objectives? Can you demonstrate your track record?
Human Resource Considerations
- What about the people? Will they fit in a merged company?
- Who are the key staff members? What are their tenures and backgrounds?
- What practices has the company used to retain talented employees?
Organizational and Development Considerations
- What is the organization structure?
- What controls does the management team use to oversee productivity?
- What physical and intellectual properties are essential to the business?
- What products are in the development pipeline? What is the time remaining and expense required to launch each product?
- How adequate and credible are the platforms and applications supporting the data and communications needs?
- The review may examine the process by which information is captured, the flow of data, and special issues.
- The legal review examines all the significant records, manuals, agreements, financial instruments utilized, insurance contracts in force, the status of litigation, regulatory relationship and exposure, and tax position.
- Reputation risk focuses on the management of customer and public relationships and images, and the extent to which management has strategies and plans in place to respond to events that harm the company’s reputation, and consequently the buyer’s reputation.
The list of information that could be examined is seemingly endless. Even the most extensive search will not be able to predict the future with any measure of certainty.
Due Diligence Cannot Eliminate All Risk
The due diligence process is meant to reduce risk, not eliminate it. We examined risk management in another blog post where we emphasized that it’s impossible to eliminate all risk.
Experienced business leaders understand this. They know that the traditional due diligence factors account for a small contributor to the company’s long-term performance.
The success of an acquisition is dependent on factors that are outside of the due diligence process. Nevertheless, it’s still important to conduct a robust due diligence process to make sure the fit is right.
Getting the Right Fit
Remember – most due diligence processes determine not to proceed with an acquisition.
It doesn’t mean your company is unprepared for growth. It just means there was not a fit at this time. Do not assume the entire process is about financial solvency. It’s about much more, and finding a strategic fit is crucial.
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