Due Diligence Checklist – 7 Things You Don’t Want to Miss

I’ve lead or participated in many acquisition due diligence investigations over the years. The process can be laborious at times but, also sometimes fascinating. Each project is unique and generally interesting but, when the company being acquired is privately held, the process can include some cool twists and turns. Since these companies have less restrictive reporting requirements than public companies, there tend to be “hidden” factors requiring tact and tenacity to reveal.

It’s not uncommon that small family-owned companies have secrets they do not want to share. There may be some skeletons in closets that were carefully placed there by the current CEO’s father or grandfather and “nobody has the right to see them,” maybe not even other family members! These are what I call, the “Juicy Bits” and, they are what make the job fun.

A few years ago, I was tasked to lead a due diligence team in the acquisition of a small, private construction aggregates company in South America. Their records were surprisingly well organized (in English) and, it seemed that the process would be pretty simple until we dug into the balance sheet.

There were some mysterious accounts that the Controller explained away as “Private Accounts” that I didn’t need to know about because they would be “taken care of” at closing. Long story short, these accounts had been capturing phantom transactions for two generations which dramatically inflated the company’s apparent financial performance and ended up being the fatal flaw that killed the deal. The CEO was hiding his father’s poor performance from his siblings resulting in the company hiding from reality. The moral of the story – know your business!

Any company, no matter the size or structure, will benefit from conducting their business as if they were about to be acquired. This includes regularly auditing the entire enterprise, analyzing the Key Due Diligence Elements, just as if it were an independent, third-party due diligence investigation. This process is guaranteed to result in the identification of issues that, if corrected, will improve the company’s performance.

A word of caution though: just because you may think some of these elements don’t need attention, think again. And don’t forget to consider potential future threats!

Key Elements to Audit:

  1. Resources – Mineral, Human, Physical and Financial
  2. Community – The Social License to Operate
  3. Infrastructure – Energy, Supplies and Raw Materials
  4. Market – Customers, Revenue Sources, and Competitive Factors
  5. Logistics – Transportation and Distribution Networks
  6. Regulatory/Compliance – Legality of All Processes
  7. Financial – Create a Realistic Proforma, Including Capital Projections

The audit should be conducted by a multi-discipline, multi-generational team composed of individuals, at least one of whom is familiar with each Element, working in unison and unafraid and unthreatened to question each other’s findings. And finally, make sure the entire team understands that their ultimate goal is to:

Examine all elements critical to creating sustainable, moral, ethical and financial value for all stakeholders.

Need help diving into these questions? Contact me.

Bob Archibald
Chief Executive Officer