Calvetti Ferguson

Doing Due Diligence Right

Doing Due Diligence Right

When a company is looking for an acquisition target, there is always the temptation to treat due diligence as just another step in the process instead of the exhaustive investigation that it is meant to be. If done correctly, however, due diligence can result in tremendous savings in time, money, and frustration.

As an example of proper due diligence in action, a Calvetti Ferguson client was recently looking to acquire a company that was larger in both revenue and assets. Initially, the deal looked promising. Rather than moving forward at full steam, though, our client chose to execute a proactive and in-depth due diligence program. In addition to the standard requests for financial statements, legal contracts, and occasional meetings between key management personnel, our client had a four pronged approach to address all aspects of the potential acquisition.

First, they set up a calendar of meetings between key executives from both companies. These meetings included executives and mid-management from the finance side and also from the operational side. This format allowed for open dialogue between the companies and had all impacted parties involved from the beginning of the process. It also set the tone for the acquisition process; it was to be friendly and open instead of aggressive. Finally, it gave both sides a clear picture of what the end results would be and kept everyone abreast of whatever changes or complications were arising.

Next, they had the accounting teams from both companies come together to discuss the key accounting policies and processes of their respective companies. By doing this, our client ensured that all major accounting issues were out on the table and that there would be no surprises in that arena further down the line.

At about this same time, which was very early in the process, our client invited us as the auditor to come in and be involved. That early involvement ensured that we could see their vision for the final structure of the merged companies.

Finally, and probably most importantly, they set up a calendar of due dates which management, operations, accounting, and audit all had to meet. They had one person from each department who was responsible for seeing everything through and holding their department accountable for meeting these deadlines. Through this they were able to keep the process moving and ensure that they had all the information necessary to make their decisions within an acceptable timeframe.

All of this helped to lay the groundwork for the merger and to give all involved parties a complete and accurate vision of what the combined company would eventually look like.

In the end, it became apparent to both companies that they were not a good fit for one another, and that a merger between them would likely prove disastrous. It was their comprehensive due diligence process that revealed multiple areas of incompatibility and showed that the end vision could not be made suitable to both parties. If they had used a less in depth due diligence process and contented themselves with financial statements, legal contracts, and sporadic meetings between management, they might have gone ahead with the merger and suffered years of issues as a result. Even though the merger did not happen, the process had a positive impact for both companies.

Manish Seth, CPA, CFE, is a partner with Calvetti Ferguson, a full-service CPA firm focused on the health care, energy and multinational sectors.