Diligentiam will not only identify Red Flags within an organization, we will identify
Green Flags that signal where additional revenue and upside value may exist for our client. Once this process is completed, Diligentiam will help our clients contemplate the deal structure. Diligentiam will handle initial communications with the seller representative.
Every buyer has a different reason surrounding why they want to purchase another company.
We at Diligentiam have categorized these reasons into three broad categories: financial buyers,
asset buyers, and synergistic buyers.
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Financial Buyers
Financial buyers are interested in the subject’s income statement, earning stream, and balance sheet, along with the overall goodwill of the company. A Diligentiam Comprehensive M&A analysis for the financial buyer most often includes the following:
- Financial Statement Review
- Liability and Exposure Analysis
- Management, Personnel, and Operations Review
- Tax and Accounting Analysis
- Legal Compliance Review
- Document and Transaction review
- Supply Chain and Client Contract Review
Asset Buyers
Asset buyers tend to focus on selling price and will attempt to determine the worth of a company based on its asset value. A Diligentiam study will establish the target company’s value based on GAAP rules and concepts. Diligentiam will perform appraisals on assets and provide a MACRS based depreciation schedule, for tax planning purposes.
Limiting exposure to liabilities is exceedingly important in an M&A transaction, but all too often, many are unnoticed. Many due diligence teams provide a buyer with the possibilities of various liabilities; however, the problem is many liabilities are not identified nor recognized. Diligentiam delivers a comprehensive analysis which can provide the buyer with insights into the hidden liabilities and increased costs involving the target company by considering past products or services, leases and property rights, lawsuits or violations, contracts and agreements, or lack thereof. Our due diligence team can analyze, assess, and provide a strategy to minimize any exposure of liability to the buyer. Diligentiam provides the buyer with the necessary due diligence to find hidden assets as well as liabilities not listed on a P&L.
Synergistic Buyers
A Synergistic Buyer is looking to leverage the capabilities of the target company to complement their own. They want to see an increase in the performance of the independent companies that are merging. In many cases, buyers attempt to accomplish cost saving synergy by eliminating duplicate overhead. Diligentiam will perform a Topgrading (Dr. Bradford D. Smart) analysis of all employees to ensure that “A” (top 10% percentile) players are identified and retained. Diligentiam will provide an employee matrix that will identify A, B, and C level employees. Consolidation of vendors and negotiation of terms, shared resources, operating efficiencies, and distribution strategies are more examples of cost saving synergies which should be analyzed through the due diligence process. This will be crucial in accomplishing a horizontal integration of the organizations that can eliminate duplicate overhead.
Many owners of companies think their business has a fixed value, when every company has a range of value that can vary depending on the appraiser and/or the buyer. For example, a synergistic buyer may purchase a company for technology that the buyer believes can service a segment of the market they are not currently addressing. A financial buyer may want a company with strong EBITDA performance to improve their own cash flow. The bottom line: different types of buyers will have different value-based goals they want to accomplish. Diligentiam will develop different thematic strategies that align with the buyer’s value based goals.
Ensuring that your M&A deal will succeed is a difficult and uncertain task. To alleviate this uncertainty, Diligentiam will provide an upside and downside prospectus of the target company through the analysis of competitor insights, industry data, and corporate cultural reviews, as well as by identifying opportunities for synergistic market partners with complimentary product strategies. We have found that many successful M&As are not the result of simply purchasing a competitor to increase market cap, but rather the purchase or merger of a target that can provide market synergy. In some scenarios, it makes sense to test the M&A by paying for the target’s assets, or by gaining access to the assets, to conduct trial runs and attempt prove if the value based goals can actually be accomplished.
Buyers looking to purchase a company, either for their key personnel, their book of business, or the location of the business are often disappointed when the key personnel leave the company after the transaction has taken place, or the location leased to the seller will not be renewed. Situations like this occur all too often because of insufficient due diligence and the human factor of an M&A. Diligentiam can provide a buyer with an analysis of key personnel contracts and likelihood of continuing with business after purchase. It is important that if a buyer is looking at a target for key personnel, customers, key suppliers, or location, that it will still be there after the transaction has been completed.
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M&A value based goals vary globally, mainly because of the strong role of banks as financiers. Recent emergence of capital markets and private equity firms have forced banks to consider multiple approaches to establishing a value for a company. For instance, in Germany, banks have traditionally taken an asset-based approach to establishing value. However, after experiencing additional competition, banks are now starting to analyze cash flow, and earning stream potential in addition to the traditional asset based value method.
Limiting risk is always the largest challenge in a M&A. Diligentiam takes a three-prong approach to establishing a target’s value. This includes our unique Green Flag approach, Topgrading strategy, and synergistic market analysis. A Diligentiam due-diligence analysis will help limit your risk and ensure a solid return on investment during your M&A.
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