Analysis underlines importance of due diligence and integration

New analysis has served to highlight the vital importance of thorough due diligence processes for businesses targeting acquisitions, as well as the necessity of a proper post-deal integration strategy once an acquisition has been made.

The research, from Purbeck Personal Guarantee Insurance, found that some businesses for sale will seek to “window dress” performance prior to sale, in an effort to make the company appear to be more secure than it in fact is.

Purbeck managing director Todd Davison said that buyers who acquire such companies, perhaps without performing a thorough enough due diligence process, face considerable risks as a result - potentially even insolvency.

Davison commented: “When a business goes through a leveraged buyout, where the target company to be acquired is loaded with debt to buy out the former shareholders, then this has an adverse cash flow and margin impact to meet the repayment obligations. It means an immediate deterioration of the balance sheet position. So, the new owners have to grow the business or deliver substantial cost savings through the business quickly, to avoid failure.”

Purbeck emphasises that buyers must carry out robust due diligence, including arranging a financial audit of all potential acquisitions, scrutinising future orders, analysing staff and identifying cost savings that could be made during the post-acquisition period.

A leading cause of insolvency identified in Purbeck’s report was owners not having a clear understanding of their business’ financials. The analysis found that directors often focus more on the operational side of the company, leaving their firm’s day-to-day finances to an accountant and meaning they are not up to date on the business’ financial situation.

Payment disputes with late-paying clients were also highlighted as a major cause of insolvencies, with Purbeck finding that many company directors who claimed on Personal Guarantee Insurance said that their business’ cashflow had been impacted by an overconcentration on customers who regularly paid late.

The report also highlighted the potential adverse impact of overtrading, with firms often tempted to raise financing during periods of strong trading, then finding that the cost becomes unaffordable once growth slows.

Summing up the findings, Todd Davison said: “Instances like overtrading can be avoided by focussing on profitability, rather than revenue growth. Equally, due diligence before an acquisition and trying not to put all your eggs in one customer’s basket can all help to make positive impacts on trading.”

Especially during periods of economic uncertainty, buyers need to be particularly stringent about both their and due diligence and post-deal integration processes. This will help to ensure that hidden risks and weaknesses are identified before committing to a deal and that buyers can deliver cost savings and drive growth more quickly and efficiently post-acquisition.

Business Sale Report can help with the due diligence process by providing consolidated financial records for all UK companies, enabling buyers to see any business’ historical financial performance. We can also connect buyers with due diligence specialists who can provide full support throughout the transaction.

Also read: Intellectual Property in M&A – The key due diligence considerations

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