What might I be missing if I do my own DD?

February 22, 2024

by a searcher from The University of Arizona - Eller College of Management in Gilbert, AZ, USA

Hello,

I'm looking at a business that has high ticket value sales. It is a 9 million in revenue business but only about 60 total sales. I'm not sure I really need to pay a ton for doing the DD for the accounting on this deal since I've got a pretty strong background in this (MBA, business undergrad degree - 8 accounting courses taken, former SB owner that did all the accounting). Just want to understand what pit falls I might be missing if I decide to do my own DD.

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Reply by a searcher
from Arizona State University in Chicago, IL, USA

Critical issues that might be missed: Financial Analysis: Professionals offer expertise in scrutinizing the financial health of the target company. They conduct a thorough analysis of the financial statements, tax compliance, debt levels, cash flow, and future financial projections. Missing in-depth financial analysis could lead to overestimating the target's value or underestimating the financial risks involved. Legal and Regulatory Compliance: Due diligence professionals examine legal standings, including litigation risks, intellectual property rights, contracts, employment laws, and regulatory compliance. Overlooking legal due diligence might expose the buyer to unforeseen legal liabilities and regulatory penalties. Operational Efficiency: Experts assess the target company's operations, including its supply chain, production processes, IT systems, and employee productivity. This analysis helps in identifying operational inefficiencies and potential cost-saving opportunities which might be overlooked without professional scrutiny. Market Analysis and Competitive Positioning: Professionals conduct a thorough market analysis, evaluating the target company’s market position, competitive landscape, customer base, and market growth potential. Lack of such analysis may result in underestimating competitive threats or misjudging the target's market opportunities. Cultural and Organizational Assessment: Understanding the culture and organizational structure of the target company is vital for integration planning post-acquisition. Professionals can provide insights into cultural compatibility, which, if neglected, could lead to integration challenges and employee dissatisfaction. Environmental, Social, and Governance (ESG) Factors: Increasingly, due diligence includes an assessment of ESG factors, which can impact the reputation and long-term sustainability of the business. Missing an evaluation of ESG considerations might expose the buyer to reputational risks and future regulatory changes. Technological Capabilities: Assessing the technological assets, digital infrastructure, and cybersecurity measures of the target company is crucial. Overlooking this aspect could result in unforeseen investment needs to update or secure technology platforms. Hidden Liabilities: Without professional due diligence, hidden liabilities such as underfunded pensions, undisclosed debts, or pending lawsuits may not be discovered until after the transaction has closed, potentially resulting in significant unexpected costs.

Reply by a professional
from University of Illinois at Urbana in Naperville, IL, USA

Thanks for the tag, ^redacted‌. Without knowing the exact business area but given the large average dollar amount per sale, I would expect that there are many legal issues to consider which you are not likely to know to look for. For example, just off the top of my head and definitely not an exhaustive list: Are there patents protecting anything? Are the patents in force and valid? When are maintenance or annuities due to be paid, and how much would those be? Are there patents held by others that might possibly be infringed? Are there patent applications by others that may be enforced against the business once they are issued? How litigious are competitors? What is the litigation history of the business, its principals, the competitors, and their principals? Was government funding used for any developmlent? Does the government have certain rights in any of the business's IP as a result? Then there are trademark rights issues, copyright issues, contract issues, insurance issues, employment law issues, etc., etc., etc. Why would anyone acquire a business of this size without proper and thorough legal due diligence?

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