When you’re in the midst of negotiating a deal and find it increasingly difficult to get answers to your due diligence queries, it’s definitely cause for concern.
“Most due diligence items are historical in nature, so the information should be readily available,” says Harry Cendrowski, founding member and managing director at Cendrowski Corporate Advisors. “You're looking at what has happened in the past. So done properly, the process, while very detailed and intensive, shouldn't be delayed because of normal operating things.”
As dealmaking has increased in volume and complexity over the past 35 years, Cendrowski has built his reputation on finding solutions to matters that threaten to derail M&A activity.
“It’s about bringing our creativity to the table for how to structure transactions, how to maximize the benefits and how to identify issues that a client could have down the road,” he says. “That's the fun part. Then you're focusing in on things that are going to drive value for the client, both short and long term. To me, those are the game changers.”
Smart Business Dealmakers spoke with Cendrowski about the evolving approach to due diligence in dealmaking.
Protect your deal
If somebody is going to write a $10 million, $20 million or $30 million dollar check, they want to know what’s really going on in the company they’re looking at. We take the approach that we want to look at not only who’s working at the company, but who might be related in one way or another to the company. We deploy some of our forensic techniques to compare things. We might compare payroll records against account vendor records to see if any addresses match up. If they do, that means there is some self-dealing going on in the company.
All information is not public information, especially if you’re buying a private company. You might not know that there is another competitor out there that could be detrimental to the business that you’re looking to buy. It’s a matter of knowing your space and knowing it well so you know what’s out there and know what questions to ask when you have concerns.
Be diplomatic and professional in how you ask questions. One of the biggest fears today is people who are chasing deals worry that if they ask too many deep questions, the company will say they are going to go talk to someone else and they’ll lose the deal. If that's the mentality of the investor or the fund, I can tell you that they're going to miss a lot of things in due diligence because they won't ask the questions.
If due diligence tends to stretch out, it could be caused by the buyer or the seller. If it's by the buyer, it gives the seller the ability to go and talk to other people. If the market is strong for that company, they could lose that deal because most deals have a limited amount of time for exclusivity when you're negotiating. If it's the seller dragging their feet, that's going to tell you that there's something fundamentally going on that might not be good as an investor. The buyer, the seller and their management teams should be trying to be transparent with each other in order to address operational and other concerns going forward.
Evaluate the management team
The management team is critical to the success of any deal. These are the people that you're going to rely on for execution. If you need to replace or augment that team, or find that they can't carry through with the execution, then you're going to be behind the eight ball basically from day one. You'll need to replace them, which is time-consuming and prevents you from responding to the market in a timely manner. Other competitors are going to get a leg up on you and other opportunities might not come to you that should have. Without a strong management team upfront and a strong leader within that team, it can lead to big problems. So your due diligence needs to include governance and understanding how the company conducts business, both at the management team level and at the board level.