As seen in The Legal Intelligencer
Increasing market share and profitability can be accomplished pretty quickly via an acquisition. Planning for the right target requires a strategy on many fronts. Assemble your team and carve out the responsibilities accordingly. Working together, united by a common goal, will create positive team morale during your process. If the deal falls through, your team becomes savvy and less inept to miss issues in your next deal.
Before you set your sights on a target, get your house in order. Your organizational structure has to make sense before you acquire, merge or establish a joint venture. A standard C corporation, while attractive for institutional investors, is uninviting for a middle market investment. A heavy tax cost reduces rates of returns, and limits various exit strategies. Consideration to a multitiered organization can be flexible for acceptance of investors, state tax planning, and acquisition debt. Start the process of your due diligence with the target by reviewing corporate minutes, board meetings and resolutions. Good record-keeping at this level is a good indication of corporate culture. Great companies start from the top and work down. Check to see who was in attendance at the board meetings. Have all patents and copyrights been registered? One of the most time-consuming steps, yet the most critical, is the review of all material contracts and commitments of the target. Diligent inquiries cannot be emphasized enough.
Financial Due Diligence
Buyers are always concerned with a target's past performance, as well as future expectations. Those expectations stem from historical data. Your initial review of financial statements and tax returns should lead you to the following questions: Is the target's accounting firm under the control of the company? Is the firm reputable and in good standing with the appropriate accounting societies and state regulators? Do the financials and tax returns on the initial review make sense with industry standards? Setting up a meeting with the accountants and making the appropriate inquiries can possibly save time in other areas. Make sure the audit has proper disclosures of activities in the footnotes. Industry standards and overall knowledge should guide you to what should be reasonably disclosed in the footnotes. Deficiencies in this disclosure can be a red flag to other issues.
Hire the Right Professionals
Do your homework, and leave no stone unturned. Successful mergers and acquisitions are not easy. The process is time consuming. You have to rely on the right accountants, engineers, architects, appraisers and possibly actuaries. Consider spending money on a quality of earnings report. There is a distinct difference between an audit and a quality of earnings report. Generally, in an audit, emphasis is on the balance sheet. The quality of earnings report is a detailed analysis of all the components of a company's revenue and expenses. The primary purpose of the report is to assess the sustainability and accuracy of past earnings as well as the achievability of future projections. In order for earnings to be of high quality, it must reflect cash flow and be sustainable. Sometimes earnings can be held up in accounts receivable, and collectability issues decreases quality.
The aforementioned issues raise just a sample of the necessary steps in a fully documented acquisition package. Proceed accordingly.