Traditionally
there have been two types of investigation carried out by the purchaser
into any acquisition. First, buyers instruct lawyers to carry out
a legal check - into contracts, leases, litigation and so forth. Second,
they engage accountants to analyse the accounts, tax position and
financial aspects of a target business. Virtually no serious investment
is made without such research. But increasingly, certain investors
and buyers are undertaking a third type of due diligence - commercial
due diligence.
Generally I am a little sceptical of the value of consultancy firms
and their armies of Harvard MBAs. It seems to me that firms who rely
heavily on outside advisers to run their business must have weak management.
Occasionally an argument can be constructed that it makes sense where
real specialists in areas such as information technology can be drafted
in on a contract basis to implement new systems - and then leave.
Perhaps in periods of savage restructuring consultants can add value
during the transition. But mostly I suspect expensive, posh consultancy
firms are bought in to big, badly run companies where the executives
are too scared, too stupid or too lazy to do the work themselves.
Perhaps the consults are there to fix the problems, yet the real faults
lies with bad people running the show. And so the answer must lie
in replacing those full-time executives, rather than paying up to
£300,000 a year per consultant! But when making acquisitions
it becomes essential to get outside advice. You need the specialist
skills and independence, and someone giving an impartial opinion as
to the risks of the grand deal you want to do. It may be you have
become emotionally committed to making the move and you need cold
logic to stop you wasting money.
This, for me , is where consultants can be really useful. Various
specialist firms have sprung up in the past few years to conduct this
type of commercial due diligence for a fee. They are a segment of
the consultancy profession, alongside strategy consultants and the
like. The better firms offer an independent, intelligent perspective
on such crucial areas as customers and competitors. This does not
mean just desk studies - looking at existing, published market reports
into the overall industry. It means interpreting raw data collected
specifically for the project in question and making well-informed
assumptions abut the trend of sales and market shares going forward.
This is likely to mean meeting and interviewing key customers and
rivals to find out at first hand if the business has sound relationships
in its marketplace and respect with the trade. |
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Vendors
of business frequently attempt to hide the fact that the competitors
have superior products or technology, or customers are dissatisfied.
On one occasion I pulled out of a deal following such an analysis,
as it showed the largest customer of the target company was about
to cancel its contract. Such advice could potentially save you millions
of pounds.
Such commercial due diligence tends to focus on the future rather
than the past - market trends, changing buying habits or tough new
competitors perhaps. Investigating accountants, on the other hand,
spend much of their time on historic numbers and their validity. Such
number crunching is important but less significant than getting a
really good idea of a firm's up-to-date reputation and performance
in the field. Advanced commercial due diligence can even include focus
groups and mass surveys, although these are difficult to carry out
confidentially.
The best consultants carry out their work with limited assistance
from the vendors, or possibly even without their knowledge in the
case of a possibly unsolicited take-over. I have always favoured using
smaller consulting firms to carry out such assignments. They charge
less and can be more responsive than the giant powerhouse consultants
or the big accountancy firms. More-over, the best such organisations
specialise in pre-acquisition investigation and therefore are really
expert.
My favourite outfits to do commercial due diligence are The COBA Group
(020 7399 4700) and PBD Consulting (020 7589 0803), both based in
Central London. They are relatively low profile organisations compared
with giants such as Bain, Boston Consulting and McKinsey & Co,
but they both work for big companies and substantial private equity
houses. Of course, the success of any acquisition is down to the judgement
and abilities of the principals, and no amount of wise advice makes
it actually happen. However, really thorough consultants' reports
can highlight defects and give useful ammunition if you want to renegotiate.
The costs are generally less than those charged by lawyers and accountants
but their work is equally vital. To me, engaging such a firm makes
eminent sense and represents a sound investment. |