The Discreet Science
Due Diligence in the Acquisition Process (Part II)
In my last post, I pointed out that many buyers make corporate acquisitions without sufficient due diligence, and discussed how we at K2 begin to look into acquisition targets’ financial stability on behalf of our clients. In this post, I’ll look a little more into the next steps: examining a company’s legal liabilities and internal oversight.
Looking into a company’s existing and potential legal liabilities is essential. Let’s say your company is looking to purchase a promising software company for $15 million. You are unaware that due to unpaid vendors, disgruntled investors and a handful of employment law suits, there exists an additional existing liability of $2.5 million. This doesn’t take into account the potential future liability that is often hidden from an acquiring company due to the acquired company’s mismanagement.
Many companies have gone bankrupt expending valuable resources on endless litigation. While the company you’re acquiring may seem innovative on its face, it won’t seem as attractive with the specter of years of litigation hanging overhead. (Or, as a recent client once put it, the “deal has hair on it”.)
Any due diligence process must identify not only obvious legal concerns, but also unearth the potential issues that may not be as apparent to an acquiring company. For example:
- Have the State and Federal court dockets been reviewed for cases against the company, or individual members of senior management?
- Has the in-house counsel been interviewed concerning existing and potential legal issues the company faces?
- Have there been disgruntled past employees, consultants or vendors? Were these issues appropriately dealt with?
- Have investors voiced complaints? Were the complaints addressed?
Any or all of these issues could easily go unexamined, leading to long-term financial and legal headaches for the acquiring company.
A thorough due diligence should also examine the acquired entity’s controls, including accounting, supervisory, financial and legal policies and procedures. Data, customer information and technology controls are also worth examining. Well-designed procedures will detect material weaknesses in business or legal issues affecting the company, and responsible companies will update these policies in writing regularly, with the CEO, CFO and/or the Board of Directors overseeing enforcement.
In our experience, we find that weaknesses in controls are often warning signs of larger issues. A control weakness can indicate opportunities for fraud, accounting irregularities, irresponsible corporate spending and generally questionable acts. Irrespective of the control in question, a lack of controls may raise questions about continuing with the existing management team once the acquisition is complete.
The due diligence process should evaluate what current management says about legal and control issues while keeping in mind former President Reagan’s adage – “trust but verify.” Reliance on what you’re told by management is insufficient in avoiding potential issues and will set the acquiring company up for future problems. What do past employees have to say about current management policies and procedures? What do former business partners say about the financial stability or accounting of the company? Friends, colleagues, enemies, the IRS, and court papers all have a story to tell and it is our belief that many of these stories can uncover important truths about a company.
In order to assess the true strengths and weaknesses of a potential acquisition, it is necessary to drill deeper before closing any deal. Making certain you have the right answers, and not just the easy answers, should be an essential part of your due diligence process and will ultimately save you and your investors time, headache and expense.
Due diligence en el proceso de adquisición: cómo evitar sorpresas desagradables
Versión en inglés
Conforme a la doctrina del caveat emptor (“cuídese el comprador”), quien adquiera un bien no podrá reclamar al vendedor en caso de defectos que conviertan el bien adquirido en inadecuado para su uso ordinario. La única excepción es si el vendedor oculta de forma deliberada defectos subyacentes o si incurre en fraude con declaraciones falsas o inexactas. K2 Global Consulting está comprobando cómo, en el mundo empresarial actual, estas situaciones excepcionales se vuelven cada vez más frecuentes; por ejemplo en adquisiciones en las que los compradores, una vez asumida la titularidad del nuevo activo, entidad o negocio, descubren que lo adquirido vale más (o menos) que el precio que habían negociado.
Entonces, ¿qué pasos debe dar una empresa o un particular durante la due diligence con ocasión de una posible adquisición? Lo primero que deben realizar es una exhaustiva auditoría financiero-fiscal antes de adquirir el negocio. Esto, que puede parecer obvio, no siempre se cumple, y hemos visto empresas que, una vez que el dinero ha cambiado de manos y la adquisición ha quedado completada, se han percibido de cuestiones de las que hasta entonces no eran conscientes.
Nuestro enfoque de due diligence es ir un paso más allá en la clásica auditoría, que sólo sirve para sacar a la luz las “vergüenzas” más visibles de una compañía, y llevar a cabo una inmersión más profunda que garantice a sus inversores, Consejo de Administración y directivos que lo que están adquiriendo son activos y no sorpresas. Nuestro modelo de due diligence requiere que la empresa adquirente comprenda que no basta con realizar preguntas a los directivos actuales. Sin duda, estos le proporcionarán las respuestas que podría esperarse de ellos, pero ¿son las respuestas correctas? ¿Cuentan la historia completa?
Una due diligence exhaustiva debe investigar y llegar hasta el fondo de las cosas pero, por encima de todo, debe cuestionar lo que los directivos digan acerca de los principales problemas que afectan a la compañía adquirida. Esto pasa por examinar desde varios ángulos los temas sacados a la luz, razón por la que nuestros equipos de due diligence incluyen experimentados investigadores de distintas disciplinas (desde abogados especializados en el mercado de valores hasta contables forenses, pasando por profesionales sobre inteligencia empresarial). En cuanto a los problemas en sí, creemos que una due diligence exhaustiva, ya sea como paso previo a una adquisición o al compromiso de fondos adicionales en un proyecto empresarial, debería evaluar varios aspectos clave de la compañía en cuestión, entre ellos el riesgo financiero, legal, de controles, tecnológico y reputacional:
Comencemos por el riesgo financiero. Al objeto de revisar a fondo la estabilidad financiera de una compañía, resulta esencial abordar las siguientes cuestiones:
- ¿Están los registros contables actualizados?
- ¿Han planteado los auditores internos o externos objeciones acerca de los datos financieros?
- ¿Cómo son las políticas y procedimientos contables, y cuánto tiempo hace que están implantados?
- ¿Han sido aplicados de forma coherente por los directivos responsables y son observados por todos los empleados?
Unas políticas contables suficientes respaldan la consecución de los objetivos de la compañía y su eficacia operativa.
A la inversa, problemas contables suscitan el temor de que no estén implantados controles adecuados que permitan identificar de forma fiable las inexactitudes significativas en los estados financieros de la compañía. Esto puede socavar aún más la capacidad del Consejo de Administración y la alta dirección para hacer cumplir y supervisar las cuestiones que afectan a la estabilidad financiera de la empresa. Cualquiera de estos problemas puede derivar en una falta de transparencia sobre el estado de las cuentas, así como en incorrecciones significativas en la información suministrada a los inversores.
Analizar los riesgos legales tanto actuales como potenciales de una compañía es esencial. Supongamos que su empresa está pensando adquirir una prometedora compañía de software por 15 millones de dólares estadounidenses. Para su desconocimiento, debido a deudas impagadas a proveedores, inversores disconformes y una serie de pleitos con ex-empleados, existe una responsabilidad adicional por valor de 2,5 millones de dólares estadounidenses. Esto sin tener en cuenta la futura responsabilidad potencial, que suele serle ocultada a la empresa adquirente, derivada de la mala gestión de la compañía adquirida.
Muchas empresas han quebrado tras enterrar valiosos recursos en un sinfín de pleitos. Aunque la empresa que se pretende adquirir pueda parecer innovadora bajo un primer vistazo, su atractivo no será el mismo una vez considerado el fantasma de años de litigios. O, como un cliente lo describió recientemente, la operación “tiene pelos en la gatera”.
Cualquier proceso de due diligence debe identificar no solo los obvios escollos legales, sino también revelar los problemas potenciales que podrían no resultar tan evidentes para la empresa adquirente: Por ejemplo:
- ¿Se han revisado los expedientes de los tribunales en busca de casos abiertos contra la compañía o contra miembros de la alta dirección?
- ¿Se ha entrevistado a la asesoría jurídica interna acerca de cargos legales, tanto actuales como potenciales, contra la compañía?
- ¿Se han mantenido contenciosos con antiguos empleados, consultores o proveedores? En caso afirmativo, ¿recibieron un tratamiento adecuado?
- ¿Se han planteado quejas desde los inversores? Si es así, ¿fueron debidamente escuchadas y atendidas?
Cualquiera de estos problemas podría fácilmente pasar inadvertido, y dar lugar a quebraderos de cabeza financieros y legales a largo plazo para la empresa adquirente.
Una due diligence exhaustiva también debería examinar los controles de la entidad adquirida, incluidos las políticas y los procedimientos en materia contable, de supervisión, financiera y legal. También conviene examinar los datos, la información al cliente y los controles tecnológicos. Unos procedimientos bien diseñados permitirán detectar debilidades significativas en el negocio o amenazas legales para la compañía, y si es responsable, ésta actualizará dichas políticas periódicamente por escrito, siendo incumbencia del Consejero Delegado, del Director Financiero y/o del Consejo de Administración la supervisión de su cumplimiento.
Según nuestra experiencia, debilidades en los controles suelen denotar problemas de mayor calado. Un control débil puede indicar oportunidades para incurrir en fraudes, irregularidades contables, gasto corporativo irresponsable y, en general, actos cuestionables. Con independencia del control de que se trate, la ausencia de controles podría hacer dudar sobre la conveniencia de mantener el equipo directivo actual una vez completada la adquisición.
El proceso de due diligence debería evaluar lo afirmado por los actuales directivos respecto a los problemas legales y el control Confiar en lo que digan los directivos es insuficiente para evitar problemas potenciales, y la empresa que lo haga se arriesga a encontrarse con problemas futuros. ¿Qué tienen que decir los ex-empleados sobre las políticas y procedimientos de los actuales directivos? ¿Qué opinan los antiguos socios sobre la estabilidad financiera o contable de la empresa? Amigos, colegas, enemigos, la Agencia Tributaria y los documentos judiciales, todos tienen alguna historia que contar, y creemos que muchas de estas historias pueden revelar verdades importantes sobre la empresa.
Determinar las verdaderas fortalezas y debilidades de una adquisición requiere investigar a fondo antes de cerrar el trato. Asegurarse de tener las respuestas correctas, y no solo las fáciles de obtener, debería ser parte esencial del proceso de due diligence y, en último término, les ahorrará a usted y a sus inversores tiempo, dinero y dolores de cabeza.
Due Diligence in the Acquisition Process: Avoiding Proverbial Skeletons in the Closet
Under the doctrine of caveat emptor (“let the buyer beware”), the buyer cannot recover compensation from a seller for defects on a property that renders the property unfit for ordinary purposes. The only exception is if the seller actively conceals latent defects or otherwise makes material misrepresentations amounting to fraud. K2 Global is seeing more and more of these exceptions in today’s corporate world– acquisitions where buyers, once taking ownership of a new property, entity, or business, suddenly find out that they’ve purchased more (or less) than they’d bargained for.
But what are the steps a company or an individual should consider when performing due diligence surrounding a potential acquisition? The first thing to consider is performing a thorough investigation and due diligence before acquiring a business. While this seems fairly obvious, we have seen companies wait until the money is spent and the acquisition is complete before realizing there are issues they weren’t aware of.
Our approach to due diligence is to take a step beyond the routine due diligence, which will uncover the obvious “warts” of a company, and perform a deep dig that will ensure that your investors, Board of Directors and management of your company will be acquiring assets and not surprises. Our due diligence model requires an acquiring company to understand that asking questions of the existing management is not enough. Sure, they will provide the answers you expect but are they the right answers? Are they the complete story?
A thorough due diligence must poke, prod and above all else challenge what management says concerning the major issues affecting the acquired company. It requires examination of the issues uncovered from various perspectives, which is why our due diligence teams are comprised of experienced investigators from a variety of fields (from securities lawyers to forensic accountants to business intelligence professionals). As for the issues themselves, we believe a thorough due diligence, whether performed before an acquisition or before sinking additional funds into a venture, should evaluate several key aspects of the company including financial, legal, controls, technology and reputational risk:
Let’s start with financial. In order to thoroughly review a company’s financial stability, it’s essential to address the following questions:
- Are the accounting records up-to-date?
- Have there been concerns raised by internal or external auditors concerning weaknesses in the financials?
- What do the accounting policies and procedures look like and how long have they been in place?
- Have they been consistently enforced by senior management and applied to all employees?
Sufficient accounting policies support the achievement of the company’s objectives and operational effectiveness.
Conversely, accounting issues raise the possibility that there are not adequate controls in place to reliably identify material misstatements in the company financials. This can further undermine the Board of Directors and senior management’s ability to enforce and supervise issues affecting the company’s financial stability. Any or all of these issues can lead to a lack of transparency concerning the state of the financials as well as material misrepresentations to investors.
Due diligence is a layered and complex process, so there’s more to talk about. In my next post, I’ll explore how we approach an acquisition target’s legal liabilities and controls.
Managing Information Overload
In the past couple of posts I have talked about how much information is out there and the challenges of sorting through and making sense of it. And now that we’ve taken a look at the issue from 30,000 feet up, I thought we should spend some time discussing practical, “on the ground” methodologies that will actually help manage the information we develop during an investigation.
One way to approach a giant pile of information is to set a goal of finding the “source” – that is, the one event, trigger, fact, statement or document from which the rest of the pile springs. If you make this your goal, you’re going to get less distracted by ancillary information and isolate the most important details.
Let’s say you find yourself just overwhelmed with ten years worth of news articles, journals, public records and transcripts.
The first step toward finding the “source” is some basic sorting. Put all the media and news in one pile, official documents in another, and toss documents that may be interesting but just don’t have any relevance to the core issue or subject. You are going to find some duplication, i.e. several news articles discussing the same event or issue, overlapping public records, intersecting blogs. Don’t discard redundant documents without a quick review. News coverage in particular is local and the focus and level of detail can vary quite a bit. (Remember the old joke headline “Area man dies in nuclear explosion”.)
Locating the “source” is easier if you establish a chronology for the case or the subject. You need to establish if what you are investigating is a one-off event or action or if it’s the product of a gradual buildup of smaller events leading up to a tipping point. A chronology is often the best way to determine if all of the information flows from the source event, or if smaller events contributed a steady stream of information leading up to the tipping point, and then continued to provide more information as the issue unfolded over time.
For example, consider President Obama’s recent surprise visit to Afghanistan versus the war in Afghanistan itself. Of course many things lead to President Obama traveling to Afghanistan, but by and large we can consider it a one-off event. He will only make this particular trip once, and just about everything that will be written about it will begin with his surprise landing at Bagram Air Base. The war in Afghanistan, on the other hand, has a much longer narrative. Certainly, there’s a day when it started, but to really understand why it happened you’d need to look back at a number of events over many, many years or possibly even centuries.
By now you’re really getting a clear picture of what kind of case you have and, by keeping your eye on the source, you can focus your efforts and scope of research correctly. Then you can better assess what documents are directly tied to your investigative goals. And you will also be better able to find the persons, media articles, research, investigation and actions by other parties that either corresponds to a distinct event or to a broader event horizon. You’ll also get a sense of which documentation and information is original, and which is building on what has been written, said, reported or investigated before.
And, of course, you are likely to learn that, in the end, there’s not really a single “source” document at all, but you will find a focal point that suits your particular investigation. Keep in mind that despite finding your own suitable “event date”, there are people and organizations that have conducted their own investigations to develop information before and after your event date. But by discovering your “source”, you force yourself to become aware of the different perspectives and interpretations.
The point here is that there are many different approaches to managing an often-bewildering array of information. Going after the source is just one tool to help you begin to make sense of it all. Of course, the best tool in any investigator’s kit is his or her judgment, and you should use yours to determine what other tools will get you where you need to be.
In my next post I will talk about sorting information by evaluating the source, which can take us to some interesting places.
“El sector financiero español ha salido de la crisis mejor que otros”
La firma entra en el negocio de la calificación crediticia independiente ● Cree que las multinacionales de nuesto país “están bien protegidas ante los vaivenes económicos”
K2 Global Profiled in Fortune
The December 6th issue of the Fortune features a profile of K2 entitled “Brand-New Gumshoe” (it’s also available online as “A Father-and-Son Detective Duo“). Please give it a look at let us know what you think.
