Due Diligence Process for Mergers and Acquisitions

Due diligence process for mergers and acquisitions is crucial.

Show Notes

Welcome to the In The Clear broadcast I’m your host Justin Recla along with my business partner and wife Tonya Dawn Recla.

Hello everyone!

So this week we’re talking about due diligence process for mergers and acquisitions.

Such a great topic. We will get into this all the time with folks who really think that they’re doing solid due diligence. Attorneys in particular for their clients and making sure that you know they’ve got all the business information and that the financials have been passed on to any CFOs or CPA is involved. Inevitably when I ask them “So who’s looking at the people involved in the business?” they get kind of sheepish you know like, one guy here lately even said to me “You know if I’m totally honest we do a very cursory look at that.” Well, of course you do. Everybody does because most people don’t think to do that. Then mergers and acquisitions those M&A folks listening, that is a very serious problem and you all know it’s kind of like the elephant in the room that nobody’s talking about. We all know that the biggest risk to the business are the people involved. You know because again the agreements, the numbers, or, whatever we’ve gotten pretty good at checking those out. Most people who you know are savvy about business read documents before they sign them. But the challenge is those documents don’t always contain the information you really need to know.

And then there’s a whole other area. I recently read an article that talked about how due diligence in M&A were really lacking on the information technology side of it as well. Yeah that’s important as well. Ultimately at the end of the day it comes back down to the people involved because like you said in a merger if you’re buying a business or you’re merging business you’re in you’re inheriting all the other problems that come from that personal interaction that the people have in the business. So whether it be piss poor customer service, ruined business relationships, missed opportunities, maybe they stepped on somebody else’s toes. You do a merger and you don’t understand those relationships and you don’t understand the people involved in the business. You’re now inheriting that big bucket of risk. 

Don’t Neglect Security in M&A Due Diligence

Right, and not only that but wouldn’t you want to know? That’s the thing that kind of baffles me and I think in all honesty what’s really going on in these arenas is it’s not that people don’t want to know but it’s that they don’t know how to go about getting the information. So, they kind of brush it aside. It’s like it’s just too overwhelming to think about trying to figure out how to really get a read on these people. Or they have talked to them, you know well you know throughout the M&A process like maybe it’s one of those where they have had discussions. So, you’re sitting there across from the person and you think you know but that’s not an unbiased read on that individual.

Yes, and your interaction with that person may be completely different than the way that person interacts with their clients, with their employees, and with you know everybody else that’s involved in the business. Of course, especially if you’re going into a merger and you’re get ready to buy that other person’s business or they’re wanting to sell their business because they’re just done with it. Of course, they’re going to be nicer to you in the process because you’re absorbing the cost you’re in their business. While it might be a great opportunity for you, you have to go into those relationships with eyes wide open you have to do your due diligence on the people involved in order to fully mitigate risk.

Yeah, and I really think, folks, gone are the days where the numbers just look really good. We just talk about this all the time we’ve developed technology world that you know, no one can hide secrets so let’s say there is something really colorful in that person’s past or in that company’s past and you don’t know about it and perhaps it goes 100 percent against your business or one of your businesses company cultures or what you stand for as an individual, that can destroy you and so reputation becomes an issue. Not only that but what all are you inheriting? There may be a budding court situation going on that you don’t know about. It’s like surprise you know and again you know there’s all kinds of wiggle room and blurry lines in that conversation but to me you know coming out of the Intel arena I’d much rather have more information than less.

Exactly.

And in using that information to make an educated decision. So not using it as a ace in the hole per se but using it to say “Hey Bob I see you have this issue here. What’s this about? How has it affected your business and how is it going to affect our merger?” We’ve had clients come to us in the middle of mergers to do due diligence on the principals involved. You know better late than never but at the point you know one client in particular came to us that the ink was already dry on the contract and they were doing due diligence after the fact because the minute the pen got put to the paper the relationship changed. Our client came to us and wanted to see what’s out there and what’s going on because they’re acting different and sure enough we did. We did our thing and they had literally inherited a nightmare of customer relationships because this client claimed to have had all these great clients while they had lost almost half of their client base in the last year prior to the merger because of the principle involved and the way he managed the company.

Unfortunately, that’s usually when things come about you know that’s the challenging part. So we like to arm our clients with as much information as possible so that they can make some smart decisions. And again this isn’t surreptitious folks we’re not going to go dig around people’s trash though we have done that. You know in all kinds of other things to get information this is just literally like, who are these people? You know develop a profile like you’d profile a business. For example, what’s the mission, what what’s the vision, what are the numbers, you know what’s their structure? You know you deserve to do the same for the people involved with them.

And again you still have to do the intuitive piece, the intuitive due diligence. You still have to like the people. If you’re if you’re merging with somebody go meet the employees, go meet the managers, meet the people that are going to be working for you, now, in that merger and acquisition because you’re going to have to get to know them, they’re now part of your business family and if something is off in the chain of command of that business it’s going to cause problems. It’s going to become an issue and unless you do that intuitive piece also in getting to know the people and their roles and the level of risk that they bring to the business. Not knowing is your ticket to a huge risk especially if you’re taking on a ton of change from purchasing the business.

 So, to quote GI Joe “Knowing is half the battle”

Haha, there is the military reference the week!  Yep, there it is. And the big word of the week is surreptitious… I can’t even say it’s too big… it’s surreptitious.

Go look it up! Haha

Here’s the thing folks, is that at the end of the day the numbers are always going to be the numbers. The agreement is always going to be the agreement. And those things are typically always well done and you can mitigate your risk from those because the numbers check out and the contracts written well.

Or there negotiated right and you’ve got a lawyer or a CP that can manage those. At the end of the day business dealings don’t go bad because the numbers don’t add up because if they didn’t add up you wouldn’t be looking at the business anyways. If the agreement was not written well to your favor or protected or was fairly balanced, you wouldn’t be doing it anyways. So, at the end of the day business dealings go bad because of the people involved. 

Absolutely. And any you know get to where you’re willing to have those discussions. It’s interesting to me that it’s totally acceptable to question people about numbers all day long. It’s not personal, right, the numbers aren’t personal. Well neither is it somebody’s reputation when it comes to their company. It’s not personal anymore or like there it has an impact.

Well and it’s a whole new level of doing business. It’s moving away from that big corporate culture mindset and moving it back into what business is really about and that’s people. Because at the end of the day without people no amount of money in the world matters. All that matters is the people involved and the impact the business is going to have and the changes that’s going to be made. And it brings it back down to Why did you get into business in the first place and you can’t do that unless you know who you’re getting involved with.

And make sure you have that due diligence process, we are not advocating for you to do a quick Google search and think you know make sure you’ve got a whole process and that includes knowing what you need to know what is pertinent in that decision making it’s not it’s not cool to go around like I said digging in people’s personal private lives. If it’s not pertinent to their business or by having a due diligence process someplace and having a team such as the Clear Business Directory on your side, you get a third set of eyes on the agreement on the people that are involved who.

From our perspective we have no emotional attachment to it. So as your due diligence company we have no emotional attachment to the people. All we are going to share with you is look here’s a potential risk because this person’s got this this and this background have you taken that into consideration. Oftentimes we get is like well I wasn’t even aware of that. It’s because you until you look into the people that are involved you’re not going to know.

Better yet we advocate for transparent due diligence process if you’re going into a merger both sides of that coin should be transparent about who they are and what’s pertinent for that decision. And that’s something that we can easily facilitate and we’re happy to do that because it’s only going to strengthen that situation moving forward. If it’s an acquisition you know the acquiring company should be requiring that those people are willing to answer some questions.

Also, including people as part of the due diligence process moving beyond just the numbers and the contracts. So, with that if you’re going into a mergers and acquisition or your looking to sell your company and your looking to raise the bar and increase your chances for success take a look at the Clear Business Directory at clearbusinessdirectory.com where we here to meet all of your merger and acquisition needs. If there is anything else, you need from us please contact us and don’t forget to make sure your business is IN THE CLEAR.

2017-01-03T21:07:35+00:00

About the Author:

Justin Recla has over 13 years experience and advanced training with the US Army and federal government. He is a subject matter expert in tactical questioning, surveillance, counter espionage, threat and vulnerability assessments, and investigative techniques. He is an educator in concepts of effective communication and has taught hundreds of future federal agents how to conduct interviews and investigations. Justin brings his skills from the military sector and delivers them to the boardroom to help business owners protect their two most valuable assets: Time & Money.