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Understanding Due Diligence: the impact it has on decision-making, and on employees.


By David Shaffer, Senior Consultant, MAP Consulting

When word surfaces that your company is a potential target for acquisition, or that you are targeting another company for acquisition, rumors typically start to fly. For many employees the unknown leads to fear, concern, and the inevitable question of what will happen both to the company and more importantly to “Me”.  Fear stems from employees believing that acquisitions are synonymous with a company’s desire to increase revenue and create immediate value for the shareholders alone; ignoring the impact the deal has on the organization or the employees.  Although shareholder value may be an outcome in the long run, studies show that successful acquisitions have two other common elements that exist in the initial decision making process:


  1. The acquisition should help the acquiring company fill a gap that is a part of their overall strategic plan.
    • This means the company being acquired provides new growth outlets through areas such as product lines or geographical access.                                                                           
  2. The acquisition should successfully align cultures and values to create synergistic gains from the combined company.
    • This means happy, integrated employees equate to thriving, agile companies that bring more to the market together than individually.


So with this in mind, let’s remove the mystery of acquisitions and mergers by taking a look at what goes on, what should be evaluated, what activities should take place, and why. One major step is looking at the financial viability of the combined organization and the potential investments that are required. This includes involvement from financial analysts and accountants who collectively determine the accuracy and reliability of the finances of both companies and work to determine the financial arrangements and requirements to consummate the deal.


Without a doubt, if there are financial concerns or issues, they need to be resolved or the acquisition may never occur. However, successful acquisitions are not only about financial statements.  There are other factors, beyond financials, that are equally important to the success and value of the deal.  These factors address the human question: How will this impact “Me”?


Value creation, from an acquisition or merger, can occur in three key areas within any company regardless of industry:

1)    Operational
2)    Organizational
3)   Management Information Systems/Reporting


Management must assess its strengths and opportunities within these three areas, as well as determine the appropriate implementation and action steps to integrate them.  As this evaluation progresses, a common focus is created around the company mission statement, best practices and accountability evolve, and so does value creation. These three value creation areas, in addition to the financial performance of the company, are referred to as areas of Due Diligence.


Due diligence is the detailed evaluation of the overall performance of a company. Whether a company’s ownership and stakeholders are looking to buy, sell or improve, due diligence identifies the areas and vital factors that will best position the company to maximize value and return on investment. Due diligence includes laying the foundation to assess a company’s compliance with its mission, vision and values.


When analyzing a business, the initial focus is to validate the financial management and performance of the organization. However, the demonstrated sustainable value of a company is reflected in the strength of the three interrelated areas that collectively impact financial performance.


A starting point for any acquisition is the completion of a due diligence assessment within each of the three areas. The purpose is to document the current state of the business and to identify the appropriate actions that need to be implemented to reach a target or expected operating model. That is, align strategy and execution to generate value. This includes retaining the appropriate procedures, policies and organizational structure that will support the culture and strength of the combined company. Finally, the appropriate management system must be in place to monitor goal attainment, hold people accountable and provide consistent on-going process improvement. Without goals, controls and accountability, the expected results of the due diligence assessment will most certainly be in jeopardy.


Following is a summary of what is looked at and expected when completing the Due Diligence process. It is what employees may or may not see, but by helping them to remove the mystery of the process itself, you will be able to provide a foundation that benefits all parties; generating support and reducing fear of the unknown.


Operational Due Diligence: Processes

The overall ability of a company to meet its goals and objectives is reflected in the on-going procedures and processes necessary to fulfill customer delivery commitment. The supply chain, from order to fulfillment, is critical not only to maintain customer service, but also to validate and determine the cash flow requirements of the company. By reviewing the key functional areas of the business and determining what gaps, if any, exist between expected and actual standard operating procedures, there is the opportunity to develop the appropriate actions that close the gaps and provide the foundation for improved process and profitability – both adding value to the company.


Organizational Due Diligence: People

Aligning the organization with the strategic direction of the company is only one aspect of an organizational assessment. It extends to the strengths and weakness of the key management and operational team.  In many acquisitions (growth or strategic business changes) organizations are faced with the challenge of retaining culture and values while still aligning with a strategy necessary to meet future goals.  As part of the organizational due diligence process, the results are focused on building upon strengths and minimizing exposure to weaknesses. The new organization must be reflective of the strategy and is a key component to making change transparent to the customer.  Acknowledging and retaining key employees is essential to this part of the process.


Management Information Systems and Reporting Due Diligence: Infrastructure

Now, more than any other time, organizations rely on technology to provide the foundation for meeting customer expectations, as well as monitoring overall organizational performance. With the growth of Internet and Intranet as a basis for productivity improvement, it is critical that the IT infrastructure is aligned to meet and support corporate strategies. This includes internal operational and financial reporting, B2B and B2C support, use of back office and legacy information systems, supply chain & customer fulfillment systems, in addition to management reporting. For many companies, the Internet is a marketing tool and a reflection of its culture and commitment to quality. It is important that the appropriate mechanisms are in place to support the future, as well as to maximize the consumer experience when interacting with the company particularly where technology is the bridge. With social media, Facebook and intelligent in-field devices, a sound technology infrastructure is critical. Although elements of technology are less costly, the overall expenditure continues to rise, as does the expanded use throughout the company.


In summary, the health of a company is not subjective, it is based upon objective evaluations from multiple areas, all of which need to align to the mission, vision and values of the company. Due diligence is an opportunity to hold the company up to a mirror and truly understand and appreciate what is being reflected. As an employee, understanding what is going on during the process and being open to opportunity for personal and professional growth helps make the process successful.  Unfortunately, many companies go through due diligence processes covertly due to necessary confidentiality arrangements.  But when companies teach employees the process, the fear of these activities can be mitigated and moral can improve.


We hope you can use this article to share with your employees, or learn the process for your own education.  There is no real mystery, and seldom do successful acquisitions occur where the values, culture and importance of key people are not retained.


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Written by David Shaffer,
Executive Leadership/GM Expert for ManagingAmericans.com & Senior Consultant, MAP Consulting


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