Posted on: December 21st, 2016
The due diligence process is of utmost importance today as buyers need to feel good about their purchase. They need to know exactly what they are buying and what kinds of obligations will be expected as part of the transactions.
They look to understand information such as liabilities, contracts, any litigation risks and much more. The following will outline some of the more traditional items reviewed in this process as well as some things that you may not have thought of.
Traditional due-diligence is followed in today’s mergers & acquisitions. These elements include:
- Strategic position– This step explores the financial and legal aspects of the deal and determines if the deal is realistic regardless of how good it appears initially.
- Financial data- Annual statements are reviewed, cash flow is analyzed along with cash restrictions. Expenses are scrutinized and placed into categories. If the company is public, then filings will also be reviewed. In regards to revenue, they also review the total amount of backlog by month for at least the past year. Pricing is reviewed along with contracts.
- Company overview/Operations- Things like why they are selling, if they have had prior attempts to sell, business plans, a full market overview, ease of entry in that industry, other related acquisitions and an internal organizational chart are reviewed. In addition, the current IT infrastructure is thoroughly reviewed to determine what systems are currently in place, if they are up to date and if there is a disaster recovery plan in place.
- Legal matters- This step involves review of any current lawsuits, shareholder meeting minutes, contract reviews, legal invoices and any other prior lawsuits.
While having a plan for these things cannot be skipped, the success rate of mergers and acquisitions could increase substantially by considering 5 key steps to follow in the due diligence process. While most due-diligence plans include extensive financial, operational, facility, technology, product and equipment plans, the fail to include the very important aspect of having a “human” plan.
This plan would include ways to integrate the different cultures and the two different employee teams into one. In fact, a recent study indicated that 33% of the respondents felt that culture integration issues led to the failure of the M&A while 60% said that the lack of successful cultural integration delayed the process significantly.
In addition, the task of setting up successful culture integration cannot be left solely in the hands of the Human Resources Department. Key management need to be involved in developing this plan. Following are 5 steps that could increase the success of your M&A:
- Diagnose culture thoroughly early on: Be sure to get a firm understanding of what is most important to your customer so that a proper culture can be developed internally to satisfy the customer.
- Purpose and goals: Establish a clear purpose and company-wide goals early in the process that everyone can believe in and get excited about. If everyone believes in what the company stands for, you will have a united front that will rally your cause and purpose and keep customer growth on track.This step is crucially important. Quarreling and division will only cause breakdown internally that inevitably trickles down to the customer level and increases the chances of failure. Once the purpose and goals have been clearly defined it’s time to make sure management and other leaders are firmly on board and support the cause. They are the backbone of your organization and unified leadership is crucial.
- Utilize your brand to drive integration: Brand establishes who you are and what you stand for. Figure out your value proposition and determine the best way to deliver that message. A strong brand message can significantly speed up the integration process.Sandy Howe, SVP of AARIS, had the following to say regarding branding in regards to integration: “I’ve gone through a lot of acquisitions throughout my career, and the leadership team is always asking, ‘How do we take the best of the best and come out with a single culture?’ The branding process helps with that- and when it culminates in marketing presenting a brand refresh, it’s the perfect, practical way to get everybody aligned.That’s because everyone in the company will have….a new and fresh everything [from clarified mission, vision and values right through to new business cards]. That creates a new ‘one team’ reality, because you then look like one team and feel like one team. Branding is a good equalizer to help form culture for a merged company.”
- Leadership: Leadership must lead by example. The culture needs to be demonstrated not quoted. Employees will be more apt to adjust to and embrace the new culture if leadership is actively demonstrating their full support and showing enthusiasm for it.
- Communication: This cannot be stressed and highlighted enough. The communication before and especially after the M&A is crucial to success. So much energy is spent on the planning of every detail leading up to the M&A and leadership sometimes forgets that not everyone is up to speed with the changes and vision moving forward.
So, while having firm plans regarding finances, technology and operations is important and fundamental, the integration of the two cultures cannot be forgotten. It should be viewed with the same urgency as the other factors.
Having a unified team inside from the start can’t help but increase the chances for satisfaction at the customer level. Having a firm plan in place can ultimately lead to higher employee retention and create an environment that is highly desirable to top talent looking for employment.
Once the hard work has been done to ensure a smooth cultural transition, celebrate it with your employees. Highlight employees that embody the culture and champion the brand.
You can even consider developing an incentive plan surrounding the culture. That’s how important this element is to success. If the traditional due diligence steps were firmly integrated with a cultural integration due diligence plan, the process would significantly improve on all levels.