Acquisitions – Is Your Due Diligence Validating the Future or the Past?

The success of an acquisition is rarely down to the price you pay according to the research. First the research: Cass Business School, concluded from detailed research covering 12,339 deals including 2917 acquisitions of distressed companies from 1984 to 2008 that price was not the determining factor for success but that post acquisition integration was the key. So the research is really clear – post acquisition planning is critical.

So here is the issue to consider – are you focusing all your efforts on validating the past? Are you auditing the financial statements, the inventory, accounting records, HR records, capital structure etc. at the expense of validating the future? Are you validating your post acquisition integration plan?

You have a limited timeframe to complete your due diligence and of course you need to validate the state of the business. However you also need to validate your post acquisition integration plan. The acquisition integration team will make assumptions to build a plan. Those assumptions need to form part of the due diligence (both commercial & legal) checklist. Here are my top 10 assumptions I’d want to validate:

Top 10 Assumptions

1. The owners really want to stay and I understand why. e.g. attractive earn-out, bigger role, access to capital to scale.
2. All key customers will come across with the deal and find the buyer acceptable.
3. There are no conflicts of interest between the seller’s customer list and the buyer’s list.
4. All equipment deployed in the business is sustainable and does not require upgrade in the short term.
5. Monthly financial routines will allow seamless integration with the buyers reporting requirements.
6. We will be able to sell the seller’s products through our distribution network (and if relevant we can sell our products through the seller’s network).
7. We understand how we will integrate the differing sales commission plans between both sides.
8. The commercial salaries including bonuses we will offer the sellers and the key managers post completion are acceptable.
9. The rules surrounding the earn-out are practical and allow the buyer to manage the business as if they own it, which they will!
10. The next 12 months under our ownership is reflected in a motivational business plan including monthly cash flow forecasts.

Related post worth a look: Post Acquisition Integration Plan.