There is much emphasis on the term “due diligence”, which can cover a multitude of sins.
It essentially embraces the activities that are taken to ensure that a subject company (usually a target for acquisition) is appropriate and that there are no hidden “nasties”.
Typically it is associated with the legal and accounting professions and the focus is on figures (especially their large fees!). It is difficult to be precise about the costs involved, but they can easily exceed £100,000 for even relatively small deals.
However, there is a considerable amount of early (and much cheaper) due diligence activity that should be undertaken to ensure that the target company is worthy of this investment in necessary professional fees.
There are a number of initial steps that can be taken in order to assess a company’s status:
- Identify companies that in principle meet the required criteria (not just those that happen to be available at the time, often cheaply!)
- Study their business plans (and discuss with the management team). Do they have a clear handle on the business? Does it seem feasible?
- Assess the management team. Are there any gaps that need filling (quickly)?
- Do some research on the market and their position within it. This covers both basic desk research and talking to contacts in the industry.
By taking these steps, firms can often enjoy an early (and cheap) warning that their planned targets are not worthy of any more attention. It would rule out a number of potential acquisitions at an early stage and save investors significant sums that could be better placed elsewhere.
With a previous background in due diligence gained through working for venture capital firm 3i for five years, we have undertaken a number of such assignments for investors. Through an assessment of the business involved, its market position and management, we have been able to inform them of the true position prior to legal and accounting fees being expended.
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