Due diligence is more than just figures and forms

Due diligence is often seen as a stuffy legal term for making sure that everything is in order prior to committing to the purchase of another business.

Well, maybe it is and we can argue over the semantics, but in truth it is at the heart of any business acquisition.

Obviously by the time you are up to this step you will have made the case for the deal to proceed, maybe for a strategic reason or perhaps to get your hands on the target company’s IP.

That is not due diligence, but you don’t need me to tell you that.

Usually, once the offer is accepted the lawyers and accountants will be all over the target company like a rash with myriad checks and comfort letters, potentially taking many months and racking up a nice large bill for you.

However, there are certain things that they will not and cannot perform on your behalf in spite of your best efforts to ensure that everything is covered by people who know what they are doing.

To what do I refer?

It’s the good old fashioned smell test.

Of course you’ve visited the premises, no doubt under certain conditions at a particular time, but in a discreet low-level manner so as not to arouse any suspicions of a sale, which is fair enough.

But is this actually sufficient to uncover anything non-financial or non-legal that may be lurking beneath the surface, typically employee discontent, signs of under investment or idle machinery for example?

However many boxes your professional team might be merrily ticking away, and however many schedules that might be signed off, nobody can perform this aspect of due diligence better than yourself.

In spite of the fact that in 2024 we have AI, nothing is a substitute for your 6th sense and your own eyes.

One of my favourites is to ask to use the toilet when on site. A spotless loo is a good start but if you have to wipe your feet on the way out, what does that tell you?

Now, you might spot something here and there which may in and of itself be insignificant but what if over several visits you continue to notice more and more apparently minor blemishes or your observations of staff interaction catches your attention.

What you see might not spell trouble at the company.  After all, it is profitable and respected in the marketplace but maybe what you see is an indicator that your culture and theirs are incompatible. No number of geeks with clipboards are going to spot that, neither it is it their job to do so.

Even requested multiple visits can answer your questions, say if they are refused or difficult to implement.

How about turning up “on spec” or perhaps loitering around the factory gate?

Perhaps it sounds a bit amateur but you’ve got to box clever in business, as mistakes can ruin you financially and take a toll on your health, with the fallout and repercussions dragging on for years.

Remember, for every business takeover success story you read about there are countless disasters that are quietly sweet under the carpet and when they do leak out they are sneered at by people like you as the result of hubris.

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