How an investigator can help investment and M&As
Much of the information crucial for investment decision-making exists outside financial statements, says Gordon Bing having decades of experience of multi-million dollar acquisitions and mergers (M&As).
“Non-financial" factors, more often than not, determine the future structure and viability of a company, Bing said. Hence, investors need full investigation into these factors before a final agreement is reached, which is called due diligence.
Due diligence for investment, M&A, and almost all business transactions, provides insights on the targeted business’s character.
Due diligence normally occurs after the parties to a deal have decided the deal is financially viable; after a preliminary understanding has been reached or seems reachable, yet before signing a binding contract, said Bing.
While the term, due diligence, originally referred to investigating a potential acquisition or merger, its meaning now covers the investigation of almost all business transactions, including the issuance of securities and private placements, real estate sales, appraisals and commercial lending, said Bing.
“Adequate due diligence is appropriate and applicable to investors and buyers in any type of business, whether large or small, manufacturing or service oriented, existing or proposed,” Bing says.
Due diligence is about:
• Verifying that the business is essentially what it seems to be.
• Verifying that the investment meets investors' criteria, reflecting what investors hope to get for their money, like income to offset losses, new facilities or an increased market capability.
Primarily, due diligence is aimed at identifying defects in the business, as the attributes would be already known in general, Bing said. Past experience, excessive caution, concerns over legal obligations and unfamiliarity with the industry all encourage a search for potential pitfalls, he added.
Due diligence fully investigates the most critical factors impacting businesses such as management competence and continuity, market trends, production capability, quality, potential litigation, employee turnover, the status of supplier contracts, and a host of other items, which are all absent from financial statements, Bing described. The investigative method includes document research, interviews, and on-site inspections.
Due diligence timely provides information the investor needs to formulate his/her positions, Bing says. With more information, the negotiations will also be easier, or at least more rational.
By William S. Oh