Mergers and acquisitions (M&A) have been on fire over the last five years or so. And, contrary to what you may think, an economic downturn could bring more M&A activity, not less.
This places more importance on due diligence than ever before. Investors must know what they’re getting. And sellers want to profit, which relies on being attractive to prospective buyers. Strong due diligence aids both causes. That’s why at Rehmann, we employ a comprehensive, multifaceted strategy that can drive deal success.
Unique purpose
Buying and selling require different approaches. However, in M&A, the main question is the same – what is the purpose? What are we trying to achieve with the transaction? Similarly, what information is needed and who needs it? The answers dictate the direction of the entire due diligence effort.
The ultimate deliverable could be a full deep dive, a quality of earnings analysis, or some middle ground in between. Regardless of the specifics, we examine every area of a business, recognizing that each deal is unique. In other words, we always analyze the earnings, tax situation, future sales, legal impacts, and so on. But how we view the information, and the questions we ask, are tailored to each deal and its purpose.
The numbers and beyond
Some due diligence efforts may overlook the interplay between an organization’s operational areas. To be fair, deals are often complex, multifaceted transactions. The numbers are important and usually take center stage. Still, success after the sale is often determined by the company’s ability to converge well into its new form, which goes beyond financial considerations. People and systems need to be integrated. If not, friction could overpower any momentum from the sale.
How can due diligence help?
When the right questions are asked up front by people with deep, relevant knowledge, potential red flags can be spotted early. Likewise, the right expertise can credibly validate transaction data, adding value and peace of mind, whether you’re buying or selling. There is undoubtedly an art to the process. Experience goes a long way. It leads to asking the right questions, in the right ways, and concentrating on what matters most.
For instance, do the financial records follow generally accepted accounting principles (GAAP)? Are there owner expenses baked in somewhere? Is revenue being reported properly? Skeletons may lie in the financial closet. As another example, in many manufacturing deals, we’ve walked the floor to understand processes and “talked shop” with operations managers. We ask what improvements they would if cash was readily available. The responses are quite telling and add “ground floor” context and clarity to deals. Along the same lines, due diligence related to information technology (IT) systems can be critical. However, unless IT professionals are involved, the work typically isn’t included as part of the standard due diligence process.
Recognizing the vital role of technology, we can include IT analysis in our due diligence. Identifying vulnerabilities in networks, systems, or cybersecurity is highly valuable information and would almost certainly impact any deal.
Finding fits
Over the last decade we’ve seen many investors and private equity firms invest for the long-haul, as opposed to holding a short-term interest. This longer view puts an increased emphasis on due diligence, as investors want to understand what they’re buying, and more importantly, that the future is promising. Fortunately, our line of work allows us to get to know investors and businesses across many different industries. In fact, we work closely with investment firms, investors and emerging companies every day.
This lends itself to a natural business “matchmaking” of sorts. We’re able to match investors and companies that may be right for each other, with strong due diligence as a centerpiece.
At a minimum, our methodology streamlines the investment process, which alone is a huge benefit. But the deeper value exists in the solid starting point that’s established because it increases the likelihood of a successful transaction, which is ultimately what drives capital growth.
Displaying the ultimate sign of confidence in this process, many Rehmann executives are investors themselves.
M&A every day
For most people, M&A activity isn’t an everyday occurrence. But for us, it is. Simply put, due diligence is part of our lifeblood. Contact us today to see how we can help you – 866.799.9580 or rehmann.com.