If you’re an established and profitable company keen to add a bolt-on business or two to your enterprise, you are probably considering the acquisition process and how you can ensure it proceeds as smoothly as possible.
After all, buying an existing business is a substantial – and potentially risky – undertaking, certainly not something to be taken lightly. Done correctly, strategic acquisitions can allow you to scale up rapidly, increase your market footprint and geographical reach, and expand your available resources and talent. Done the wrong way, your acquisition could become a costly and drawn-out mistake, one of the many mergers and acquisitions that fails to recoup its value once the deal has been completed.
With so much at stake, you’re surely keen to discover what steps you can take to streamline and simplify the M&A process and maximise the value of your proposed deal – avoiding any problems and pitfalls along the way!
Fortunately for you, we’ve compiled this essential guide to one of the most crucial stages of the acquisition journey – due diligence. With the aid of the following insider tips and insights, we hope to ensure that your acquisition goes on to be a resounding success for all concerned.
Let’s begin!
Why is due diligence so important?
First things first – what is due diligence and why is it so vital to the acquisition process?
As you may know, due diligence is the part of the transaction where you get to have a thorough behind-the-scenes look at the business you are thinking of buying.
During this phase of the proceedings, you will be granted access to the company’s legal and financial paperwork, as well as everything else pertaining to its daily operations – from supply chain documentation to customer contracts and the business’s property or equipment leases.
By scrutinising all this essential information, you should be able to make an informed decision about the health and viability of the company as an acquisition prospect. You will also become acquainted with any existing liabilities your target has, allowing you to weigh up whether it’s worthwhile proceeding to deal completion.
Companies that famously got it wrong
This may surprise you, but some major businesses – with worldwide reputations, no less – have tried and failed at the due diligence process.
Perhaps most notably, none other than Hewlett Packard (HP) neglected to carry out rigorous due diligence during its acquisition of Autonomy back in 2011 – even though they were forking out over £11 billion to buy the software company.
As a result of HP’s lack of attention to detail, they failed to notice that Autonomy’s records were plagued by financial discrepancies. Less than a year after the purchase, the value of the new acquisition plummeted by over £8 billion, representing a significant financial loss for HP.
An even more drastic loss was incurred by Daimler when it decided to join forces with Chrysler back in 1998, in a deal worth $40 billion. It was hoped that combining the two manufacturers would result in a global powerhouse that could take on the likes of Volkswagen and Toyota.
Sadly, the due diligence stage wasn’t conducted rigorously enough and Daimler ended up having to sell Chrysler to a private equity firm in 2007, following several tough years blighted by cultural incompatibility and poor integration, This catastrophic merger cost Daimler almost $30 billion.
Of course, there are many more famous examples of due diligence failures, but the two we’ve mentioned above amply demonstrate the serious risks that you can face if you decide to neglect your due diligence.
Keen to avoid following in the footsteps of HP and Daimler? Read on to discover how you can ensure you don’t repeat their costly mistakes.
Mastering the M&A process: getting due diligence right
To help you pass the due diligence phase with flying colours, here are our top tips on how to do it right.
1. Planning makes perfect
Before you even begin the due diligence portion of the acquisition process, you need to set your objectives for the deal and ensure that your business broker or legal team is fully acquainted with the facts they need to discover.
For example, you will need to detail whether you are embarking on an asset or share sale, whether there are any excluded liabilities, and whether you will be taking on the business’s current property or not.
By ensuring that you have well-defined goals for the transaction – and by imparting these goals to the people responsible for conducting your due diligence – you can streamline the entire process and help to promote its success.
2. Carefully review all the company records
During due diligence, your intended target will hand over reams of paperwork, including financial records, tax returns, articles of incorporation, IP licenses, and various contracts.
It’s important to analyse these records very carefully to find out whether they reveal any potential pitfalls or hidden liabilities – such as a contract that is being disputed, for example, or some possibly problematic financial discrepancy.
3. Don’t feel pressured to be hasty
With so many aspects of your potential target to consider – from its finances to its compliance documentation and its operational paperwork – it’s vitally important that you give yourself enough time to scrutinise everything.
Don’t feel pressured to rush through the process and tick all the boxes as quickly as possible, or you could find yourself following in Hewlett Packard’s footsteps. You also shouldn’t be afraid to ask questions if you think you have found something problematic among the company’s many documents.
4. Create a final report
Once you or your team has combed through all your acquisition target’s paperwork, it’s a good idea to create a final, authoritative report detailing your findings and highlighting any areas of risk.
This report will help you when it comes to negotiating a final price for the purchase – if you decide to go ahead with the acquisition. Alternatively, this report may reveal that the acquisition would result in too many risks to be worth pursuing; in which case you will have wasted some time, yes, but you will also have saved your company significant amounts of money and heartache!
How a business broker can help
There’s clearly no denying the importance of rigorous due diligence during the acquisition process. Prioritising this step can mean the difference between your proposed deal failing – or succeeding.
If you are feeling a little concerned about this vital stage of the transaction, or any other element of the acquisition journey, then you may find it worth your while to hire a business broker. A skilled and experienced business broker can take on not only the due diligence phase, but every other step of the M&A process, removing the burden from your shoulders and allowing you to focus on running your own business and preparing for a seamless integration if things go according to plan.
Harris Acquire – always by your side
At Harris Acquire, we understand the complexities and potential pitfalls that can plague mergers and acquisitions before they even have a chance to get off the ground. That’s why our small but expert team is so passionate about assisting the buyers and sellers of businesses in maximising deal value and ensuring a smooth and seamless transition for everyone involved.
As a result, if you are worried about due diligence or any other aspect of an upcoming acquisition, why not hire our experienced team to step in and take the weight off your shoulders? We will oversee every step of the transaction, from initial contact to negotiations and, of course, that all-important due diligence!
For a straightforward and stress-free acquisition, choose Harris Acquire!
Give us a call today
Keen to get the ball rolling with your acquisition this year? Give us a ring on 01926 757100 or send an email to Hello@harrisacquire.com and our friendly, knowledgeable team will be happy to help you meet your investment goals in 2025.
