…so you better get used to it.
We all know the world has changed in the past 18 months, and in keeping with those changes potential purchasers of companies need to change their due diligence focus as well. In that regard I’d offer the following:
Focus on the future: In the past financial due diligence was historically focused; however, in today’s economic environment historical performance may not be an accurate indicator of current or future value. Evaluating the sustainability of earnings remains a critical and increasingly complex part of the due diligence process and buyers should be cautious of short term unsustainable measures taken by potential acquisition targets to temporarily improve their performance metrics.
Cash is still king: Now more than ever, buyers must understand not only the cash-generating abilities of a business, but also the cash required to sustain and fund its growth. Working capital that is artificially lean and deferred-capital spending are areas requiring heavy scrutiny.
What the numbers don’t tell you: Financial metrics are only half of the picture. Operating efficiency, customer and supplier relationship quality and longevity, key management effectiveness and retention, strategic focus and responsiveness, and their collective contribution to value merit careful and ongoing evaluation throughout the deal process.
Hopefully if you keep the above in mind when you look at potential acquisitions you’ll successfully be able to navigate the brave new world we are all living in.