In addition to the pure financial costs associated with M&A due diligence, there are other potentially more significant costs that are often overlooked.
Traditionally, M&A due diligence has been conducted well towards the end of the M&A process since the costs are substantial. It is traditionally carried out by accounting and law firms who have a firm mind for risk mitigation. As a result, the direct financial cost can be substantial, often in the range of $50-100,000 and sometimes more. Perhaps worse, done at the end of the process means that you and your management may have expended significant resources before you become aware of material issues that either reset the value proposition or price expectation, or perhaps end up being a deal breaker.
The second big cost of due diligence is somewhat hidden and rarely considered – the opportunity cost of your time. Your time is probably the most precious resource that your business has, and it is likely in short supply. Giving your time over to M&A activity and in particular to investigating your M&A opportunity is time taken away from growing your business – what opportunities are you missing out on while administering this deal. And worse, if the deal doesn’t come off, then it is dead time!
The third cost is management distraction from your core business. There are businesses that have suffered greatly both operationally and financially because senior management either less available or not closely watching their core business after being drawn into protracted M&A activity. It is better, for the sake of protecting and preserving your existing business, that you take an oversight role of the M&A activity and keep your eyes firmly focused on what you business has to achieve.
There is a maxim in the start-up world that suggests that if you are going to fail, fail fast. Given these financial and non-financial costs we believe that same adage also holds true in the M&A setting. You want to know as early in the process as possible whether the M&A opportunity is in fact a good opportunity, or whether you should cut and run. But at the same time you don’t want to miss the opportunity if it has legs.
A great strategy for arming yourself with the intelligence you need to make a fast decision in a cost effective manner is to conduct a Threshold Due Diligence as early in the process as the other party will permit.
An M&A Threshold Due Diligence will, done earlier in the process, shift information asymmetry back in your direction, help inform the price discussion, and allow you to negotiate from a position of strength. It will also help you control the process and retain the initiative. Further, having an independent and commercially oriented team (as opposed to traditional lawyers and accountants) undertake the Threshold Due Diligence will provide a faster more economical outcome that presents both the opportunities and prospects for the business as well as the risk mitigation.
Contact us at Intellix if you believe that being armed with more intelligence earlier in the process would save you valuable time, distraction, and money.
This article is based on research and opinion available in the public domain.