Category Archives: Business Due Diligence

Business Due Diligence

Due diligence is a term traditionally used to reflect the analysis activities that happens during merger and acquisition activities. Nowadays, this process has been extended to include the evaluation of business affiliation and partnership agreements.

Business due diligence includes legal due diligence and financial due diligence. During this time, financial assets of a business, articles of incorporation, market share, technology, hardware and business competencies are thoroughly examined. Unfortunately, there are certain times when everything does not remain the same in a business, especially when it comes to cultural and integrating “human systems”.

Statistics show that only 15% to 25% of the businesses were able to live up to their expectations. 25% to 30% of the businesses are reported to be outright failures, with the acquired entity being liquidated at a loss within 3 to 5 years of acquisition. Rest of the portion result in little or no apparent benefit to the buyer’s shareholders.

In the recent times, there are a number of companies paying too much for the organizations they are acquiring. Due to the declining equity prices, there has been a disconnect between the owners who don’t know what they want for their business and what operating companies are willing to pay, whether in rapidly declining stock or cash they borrow at escalating interest rates. This kind of disconnect last happened in 2001 when the economy went into hibernation. Over-valuations may have gone up to millions but potential losses that may have incurred due to lack of cultural integration could be even costlier.

The Cultural Due Diligence process covers key cultural and organizational effectiveness domains including:

 

  • Leadership: vision, mission, values, business strategy development, leadership effectiveness and ethics
  • Relationships: trust, collaboration, inter/intra group relationships, community and customers
  • Communication: feedback, information sharing, employee trust in information
  • Infrastructure: formal procedures, processes, systems, policies, structure and teams
  • Involvement & Decision Making: authority levels, accountability, expectations and the decision making process
  • Change Management: creativity, innovation, recognition, continuous learning and diversity
  • Finance: perception of financial health and the role of the employee and the level of financial comprehension and impact on the business
  • Cultural Descriptors: a list of predetermined values which can be customized to reflect the organization’s values.
  • General Climate: open-ended questions that capture the stories and suggestions from employees.