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Due Diligence - more important than ever

I read a very interesting article in today’s FT regarding buyers compromising on the quality of Due Diligence. 

The article illustrates the short cuts taken in the Due Diligence process.  Large deals took only 80 days to complete in 2008, down from 142 in previous years (according to Towers Perrin).

Whilst the article focuses on the bigger M&A transactions, the principal is the same for buying any SME business. Reducing the level of scrutiny into a prospective purchase carries enormous risks – the article refers to the infamous ABN Amro acquisition as ‘one of the most value-destroying deals of all time’. 

Due Diligence is the unglamorous relative of corporate finance. It is a methodical process that starts with an assessment of the key risks on which the assumptions of a businesses value are based. It then runs through a series of checks, reviews and analysis. The outcome from Due Diligence should provide a buyer with comfort, and if not, should be a solid resource for renegotiating the price.

Perhaps the days of limited access online data rooms – with terms dictated by the seller – are nearing an end? It is safe to say that 2009 is a buyers market, and the basis on which deals are struck will change.

Those with capital, and the guts, will come across some bargains in the current climate. However a short term saving on Due Diligence costs, can lead to many years of problems for a buyer. As Lina Saigol’s article states ‘the due diligence process … is critical to mergers and acquisitions and one that should be intensified, not diminished, during times of crisis.’

 

 

Date: 18th February, 2009
Author: Julian Dobbin

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