Due diligence is more than just hammering away at a company to find out everything that might be wrong with it. It is about taking a focused approach throughout the acquisition process to uncover key points that will help you methodically evaluate a company to make sure it is the right fit.

Traditionally, due diligence takes place fairly late in the acquisition process, and is focused on rooting out the weaknesses of the target company. You are looking to uncover liabilities and understand the risk that comes with them. This kind of cautionary analysis is certainly an important milestone, and it can allow you to renegotiate the terms of the deal based on your findings. Due diligence in the traditional sense has also been a way to give yourself cover if problems that may arise later.

However, due diligence at its best means far more than just ferreting out hidden liabilities. If you follow recent thinking in M&A, due diligence is equally important as a tool to uncover concealed opportunities.  When you adopt this new perspective, you won’t be waiting until late in the acquisition process: you’ll be conducting due diligence right from the start. This new approach will help ensure thorough due diligence is conducted in order to maximize the success of your acquisition.

Learn more in our webinar A New Thinking on Due Diligence.

After this webinar you will be able to:

  • Describe how to organize due diligence to maximize efficiency and get the information you need to move the deal forward
  • Define what items to look for by key functional areas (sales, marketing, HR, IT, etc.), including financial due diligence
  • Explain how items uncovered during due diligence can affect deal structure and terms
  • Utilize tools to organize due diligence findings

A New Thinking on Due Diligence

Date: Tuesday, May 16, 2017

Time: 1:00 PM – 2:00 PM EST

CPE credit is available.

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We generally recommend taking between 30 and 60 days to complete due diligence. We find this is enough time to complete a thorough evaluation of the business without letting the process drag on.

Due diligence will include onsite visits with your internal team and your external team of lawyers, accountants, and your third party M&A advisor. Your internal team should include more than just your CFO; we recommend involving your functional leaders from sales, marketing, and operations in this process because they will be in charge of running those functional areas once you complete the acquisition. Involve these functional leaders as early as possible so they can start learning about the business that’s being acquired and not only look for issues but also identify opportunities where you can realize the value of the acquisition.

In addition to onsite visits, you also have data requests that are sent out the acquisition prospect, asking for information about the company. We try to make this process a bit more interactive than a simple checklist by having a conversation around what is important to the business. Information is typically shared in a virtual data room which keeps the files secure and ensures only approved viewers access the documents.

One important thing to remember is that you can never completely eliminate risk, no matter how thorough you are during due diligence. We have a saying “Due diligence will go on forever…if you let it!” At some point you have to call the question and decide if you’ll pursue the deal or not. You’ll never uncover 100% of the issues during due diligence, but that’s why you have attorneys draft reps and warranties that can protect you if there are things found out after the deal. On the other hand, you’ll never uncover 100% (or any) of the opportunities by just evaluating the company. You will have to execute the acquisition in order to realize the benefits.

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Acquisitions can transform your company’s growth trajectory and set you up for long-term success. You may choose to use acquisition because your organic growth has stalled and hiring additional sales people or investing in R&D will not not help you achieve your business goals. Acquisition is fast and opens the door to many new growth options by bringing on board resources like new technological capabilities and key employees,

Capstone Vice President Matt Craft had the opportunity to speak on “Growth through Acquisitions” on the Exit Readiness Podcast with Pat Ennis. Matt explains key drivers for pursuing acquisitions and how to maximize your potential for success.

In this episode Matt and Pat discuss:

  • Why you should considering using M&A to grow your business
  • How many companies you should look at before closing a deal
  • What to look for during due diligence
  • When to get advisors involved in the M&A process
  • Determining the best direction for your company
  • How long does an acquisition typically takes
  • And more!

Listen to the episode now.

While it’s an important milestone, a signed letter of intent does not guarantee a successful acquisition. Just ask Pfizer who withdrew its $150 billion bid to acquire Allergan after signing a LOI. Pfizer ended up paying a breakup fee of $150 million.

After the LOI is signed, you still have a few major steps to take before the acquisition closes including due diligence, final valuation drafting the purchase agreement, and integration planning. In this final stage of the M&A process, consulting with external advisors such as lawyers and valuation experts is important, however you must remain actively involved in the process and continue leading the acquisition. At the end of the day you, not the lawyers – will own the company and have to live with the decision.

It is important to take a thorough look at these technical issues and consult experts while maintaining your leadership and guiding the acquisition. Don’t let some mistakes you make during this final phase derail the months or even years of hard work you’ve put into the deal. Gain confidence in your decisions in our webinar “M&A: From LOI to Close” on November 10 and learn how to navigate these steps move the deal to the finish line. This webinar will provide insight any professional involved in M&A will want to know.

After completing this webinar, you will be able to:

  • Explain the structure of an LOI and how to make it beneficial to your situation
  • Describe how to manage the Due Diligence process from both the viewpoint of the Buyer and the Seller
  • Utilize strategies to negotiate an agreement that is beneficial to both sides
  • Identify how valuation is affected during the Due Diligence and Closing processes
  • Recognize what is expected at Closing
  • Begin to execute your Integration game plan

M&A: From LOI to Close

Date: November 10
Time: 1:00 PM ET – 2:15 PM ET
CPE credit available

Photo Credit: Simon Law via Flickr cc

One of the challenges of due diligence is that you often do not have access to all the data. Of course you want to know every last detail about the acquisition prospect so you can make the best decision. Unfortunately, the real world is never perfect. The prospect may have an incomplete or no record of the requested information or may be unwilling to share in-depth details.

In these situations, you must focus on obtaining the information that is critical to you. Think back to your one reason for acquisition. Your acquisition strategy should drive your integration strategy and the information you collect in due diligence. For example, if your strategy in acquiring the seller’s organization is to add a new technology, most of your due diligence and integration questions should be focused on technology. You may not be as concerned about gathering in-depth information on their sales department.

Quite frankly, getting all the information is unrealistic. And even if you did have access to every last detail, you have to remember that some of them are more valuable to you than others. It’s important to establish priorities and focus on what matters to you.

Due diligence will go on forever…if you let it. We once had a situation where the client had been in due diligence for over a year. At that point you have to ask yourself, “Do you really want to do a deal?” Letting due diligence drag on for months and years is can be tiresome and pointless. If due diligence lasts too long people start getting frustrated and momentum dies down. You need to strike the balance between thorough and exhaustive.

Remember, due diligence is not an academic exercise. Your purpose during due diligence is not to find 100 percent of the data for the sake of information gathering. The goal of due diligence is to learn enough about the company so you can properly evaluate it and decide if an acquisition makes sense.

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Yahoo says the private information of at least 500 million has been compromised due to a cyber-attack in 2014. In the biggest security breach to date, hackers gained access to sensitive information including names, emails addresses, telephone numbers, birth dates, passwords, and security questions.

The security breach has ramifications not just for Yahoo and its users, but also for Verizon, which is currently in the process of acquiring Yahoo for $4.8 billion. Even though the cyberattack occurred in 2014, Verizon only found out about it last week. As a result of the hack, Verizon could possibly walk away from the deal or renegotiate the price.

The hack on Yahoo highlights the need for functional due diligence in order to identify all critical information that could potentially impact a deal. Leaders tend to focus on financial and legal data during due diligence, however failing to fully research other areas of the business, including cybersecurity, can be detrimental to your acquisition. You don’t want to find a “surprise” after the acquisition closes.

Functional Leaders Critical to Comprehensive Due Diligence

Functional due diligence is one of the best ways to ensure you are making decisions with the most complete data. This means incorporating leaders from each of the functional areas of your business – IT, sales, marketing, operations, accounting, finance – early on in the due diligence process. These leaders are involved in the day-to-day tasks of running the company and have a high-level of familiarity with their functional area. They are specialized experts who can spot problems, identify solutions, and ask appropriate questions that other executives may overlook.

It’s best to have each functional leader develop their own list of questions based on their experience working in the functional area of your business and the overall acquisition strategy. Next, have the functional leaders from your company meet with their respective leaders on the seller’s side to gather the necessary information. Once each functional leader has met with their counterpart, you can compile the individual lists into one comprehensive data set that covers all aspects of your business in thorough detail.

An addition to identifying risks and critical pieces of information, functional leaders can help develop and implement your integration plan. They will be able to anticipate specific integration challenges you may have and help develop solutions to avoid these pitfalls. Involving functional leaders in due diligence increases your chances of a successful acquisition.

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During due diligence most companies will present you with their formal documents including HR manuals, procedures, financials and organizational charts. It’s not enough to rely on these documents alone; if you want to know what a company is really like, you’ll have to dig a bit deeper. One way to go beyond the surface is to have functional leaders from your organization ask their counterparts in the seller’s organization to explain the following questions:

  1. What is the company’s organizational structure?
  2. Walk me through the process from receiving an order to getting paid?

We usually do this during lunch when they are out of the office and have them draw or write it out on a sheet of paper. These more casual conversations provide great insight into the actual workings of the company.

We once had an employee draw an organizational chart with a zookeeper and various animals. We found out that it was a direct report to the CEO who controlled the business and had generated a tremendous amount of animosity among the rest of the staff. This piece of information became vital to our integration planning. We would have never learned that if we had only relied on the formal documents that were provided.

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You’ve developed your strategy, identified the right markets, negotiated with the owner and papered the deal. If you think once you sign on the dotted line your job is done, you are mistaken. The M&A process doesn’t end when the deal closes. M&A is really a journey “from beginning to beginning” where the consummation of a deal is actually a fresh beginning for the newly merged company. Ensuring the pieces of both organizations mesh the correctly during integration is crucial to the success of an acquisition.

Poor Integration Can Ruin An Acquisition

Integration issues can plague a company long after the deal closes. Take United Airlines as an example. Although it’s been five years since the merge with Continental Airlines, the company is struggling to integrate its workforce. United’s flight attendants are still operating as if they worked at two separate companies, which has created operational challenges, damaged employee morale and company profit, and created unnecessary complications. Since the merger, about six percent of United flights have been delayed due to issues such as crew scheduling or maintenance problems. Understandably employees are frustrated. The failure to integrate effectively has eliminated the synergies – such as economies of scale and scheduling flexibility – that one might derive from having a larger workforce.

Why Do So Many Companies Struggle with Integration?

Leaders tend to think about integration as an afterthought, when really they should begin thinking about integration long before the deal closes. When it comes time to implement, they are “suddenly” faced with unanticipated challenges that could have been avoided or planned for had they started looking at integration earlier.

“What almost always gets underestimated, though – and often overlooked altogether – during due diligence is the actual integration of the new capabilities and how (or whether) it will work,” says John Kolko, Vice President of Design at Blackboard.

And as Kolko points out, if you don’t begin thinking about integrating prior to closing the acquisition, you may end up acquiring something that isn’t aligned with your strategy.

When you start thinking through integration issues and what the newly merged company will look like, you can get an idea of if and how the acquisition will operate post-closing. Will you let the company operate as a standalone business? Will you train employees to use your sales system? How will you leverage a new capability with those you currently have? Use your strategic rationale for acquisition to guide your decisions on integration.

Develop a 100-Day Plan

Thinking about integration early also allows you to be prepared and swiftly implement your plan once the deal closes. As the buyer, you only have one chance to make a good first impression with your new employees. The first 100 days of an acquisition are a critical time period when employees are less resistant to change. You have a unique opportunity to make sure everyone is in alignment during this time. Develop a 100-day plan prior to closing so you are not scrambling to put something together when it comes time to execute.

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During formal due diligence, which typically begins after signing the letter of intent, you gain access to in-depth information and begin taking a closer look at the acquisition target. Traditionally the primary purpose of this stage of the M&A is to identify significant risks that could impact the terms of the deal or put it in jeopardy.

However, I would advocate a broader perspective. In addition to risks, I’d encourage you to intentionally seek out hidden opportunities.  I recommend sorting your due diligence findings into three data buckets – red, yellow, and green. Red bucket items are liabilities you need to keep your eye on, yellow bucket items are acceptable risks that may be good or bad, and green bucket items are integration opportunities that could add value to the deal.

Uncovering a red bucket item doesn’t mean you automatically have to walk away from the acquisition, but it may mean you need to reassess or modify the deal. There are, of course, issues that will cause the deal to fall apart. For example, I recall discovering a pattern of under the table payments — one liability where we had to walk away.

But how in principle do you know if what you’ve uncovered is a deal changer or a deal breaker?

It really comes down to risk assessment and if you think the deal is still worth it. Fortunately, you don’t have to make this decision on your own. Confer with your acquisition team, both your internal leaders and external advisors.

Let’s say you’re confronting a clear-cut red bucket item. Here are some questions to ask: Is there a way to carve out or isolate yourself from the liability? Would modifying the transaction still fit with the strategic opportunity that’s driving your interest in the deal? Is any remaining risk worth the overall strategic benefit?

Whatever the issue, be sure to have frank discussions with the seller about it. Ask for a full explanation of what happened, and why, and how it affects the business going forward.

Once you’ve taken some time to evaluate a red bucket item, it becomes a simple business decision: Do you want to proceed with the deal or not?

At the end of the day, there’s no way to completely eliminate risk from an acquisition. After all there’s no reward without risk. But by conducting thorough due diligence and taking a strategic look at red bucket items, you can minimize liabilities and protect yourself from unnecessary hazards while maximizing your opportunity.

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Culture is an important part of an organization, but it can be difficult to define. Unlike other areas, such as finance and operations, which have concrete metrics like revenue, EBITDA, and number of employees, quantitatively measuring culture can be challenging. Leaders often rely on their “gut” to understand another company’s culture, but this leaves an incomplete picture.

When pursuing mergers and acquisitions, fully understanding the seller’s organization, including its culture is critical to your success. Rather than relying on subjective impressions, we use the Cultural Assessment Tool to measure a company’s culture.

We look at about two dozen key areas and scrutinize how the company goes about doing business in each area. For example decision-making: Is it centralized or decentralized? It is fast or is slow? Is the company consensus-building or dictatorial? We use this tool in the first place to look within, and then to analyze a prospective acquisition. For implementation, we use an online questionnaire tool, such as SurveyMonkey, which is easy to deploy and delivers quick results.

The Cultural Assessment Tool

The Cultural Assessment Tool

How we apply the Cultural Assessment Tool depends on the size of the organization. We typically approach the process on four levels: shareholders, executives, managers, and employees in the organization. What we’re looking for is the perspective on the company’s culture at each level, so we can create a crosspollination of views across the organization. What often causes surprise is how differently people at various levels may view the same company culture.

For example, we worked with a company where the shareholders felt the culture was open and transparent, with flexible, nimble decision-making that nurtured innovation. The rank-and-file staff held a diametrically opposite view. They didn’t feel that the mission and operational plan were at all well communicated. In fact, they saw the culture as closed, dictatorial, and averse to consensus-building. It was almost as though we were talking about two different companies.

Using the Cultural Assessment Tool is one way to objectively measure and evaluate your own culture and the seller’s culture during due diligence.

Due diligence is an important step in the acquisition process that comes prior to closing a deal. Most people think about due diligence from a risk assessment standpoint or as a checklist of items that must be completed in order to move the deal forward.

Traditional reasons for undertaking due diligence include evaluating strengths and weaknesses of the seller’s organization, uncovering liabilities, and understanding risk. Ultimately the findings in due diligence are used to determine whether to proceed with the acquisition. Often, if liabilities are uncovered, buyers will try to renegotiate terms and get a lower price based on the findings.

While these traditional reasons for due diligence are useful and accurate, they can be too restrictive. By only focusing on the negatives in the organization you limit your thinking. Here are four ways to broaden your perspective and maximize the effectiveness of due diligence.

  1. Focus on opportunities – Instead of concentrating only on risks, think about how you create more value in the organization. For example, the seller may have a high cost for raw materials. Under the traditional approach to due diligence, you would flag this finding as a negative. However, this could be an opportunity for you to improve the company’s cash flow. As the buyer, you may be able to reduce cost of raw materials because you have a better purchase price due to the high volumes you are already buying.
  2. Plan for integration – Due diligence should not be used only to renegotiate terms or beat people up on price; it is really a tremendous opportunity to focus on integration and integration planning. Rather than focusing on yesterday, use it as an opportunity to guide your planning for the future.
  3. Identify star employees – We often ask the owner to identify key staff at their organization, but during due diligence you have a chance to do this for yourself. These star employees could contribute to the success of your organization for years to come.
  4. Craft a creative deal structure – If during due diligence, you find some problems with the organization, you don’t have to completely abandon the deal. Using a creative deal structure may allow you to get the deal done while isolating the liabilities. Instead of thinking about the deal as a binary decision of either 100% acquisition or nothing, consider how you can structure the deal for success. Perhaps a carve-out or minority interest would work in your situation.

Learn more in our upcoming webinar “A New Thinking on Due Diligence” on Thursday, May 26 at 1:00 PM ET.

A New Look at Due Diligence

Date: Thursday, May 25, 2016

Time: 1:00 PM EDT

Q: How often are you able to bring together both buyer and seller functional personnel during due diligence? Some sellers might be sensitive to confidentiality and not open to bringing their personnel into the fold.

A: When conducting due diligence, we advocate a functional approach, where leaders from the buyer’s organization meet with the seller’s. There are a number of advantages to this approach including paving the way for a much smoother integration once the deal is complete. However, sometimes you have cases where the seller, most often the sole owner of the company, wants to keep the deal quiet for as long as possible. Of course, it’s natural for a seller to feel this way because he or she does not want to alarm among the employees or generate unrest in the business for a deal that may or may not happen.

In cases like these, we have been most successful if the owner has at least a few trusted confidants that can act as proxies for some of the functional area leaders. In this case, you will not have an army of twenty functional leaders from your organization meet with the respective leaders on the seller’s side, but you may compile lists of questions that will be directed through a Vice President of Human Resources or a Vice President of Operations that the owner trusts. As much the owner wants to maintain confidentiality, we strongly advise he or she has at least one or two others from the organization involved in the transaction and due diligence.

If the owner wants to keep the acquisition completely under wraps, it is up to you to make a business decision of whether or not you want to continue pursuing M&A with the company. If you do continue down the path, you should have strong reps and warranties because you are not able to conduct accurate due diligence prior to the transaction closing. This way, there will be some recourse for you should you discover anything after the deal is announced and you have already taken over the company.

* This question was asked on our webinar “M&A: From LOI to Close.” Learn more about Capstone’s webinar series.

Cultural due diligence is a critical task in the acquisition process. It exposes hidden problems and risks, but also may identify opportunities. However, if you do uncover red flags, you may need to reevaluate the deal. Sometimes you must simply call it off.  We have walked away from a transaction when due diligence revealed a problem.

Huge Ethical Difference

The most obvious reason to back out is when there is a huge difference in ethics or values.  At one meeting with an owner, we asked to see the company’s books and were asked: “Well, which set of books do you want to see?” Of course we wanted to see the accurate ones. More investigation revealed a culture of cutting corners. People weren’t hesitant about stepping over the line in ways that to us were clearly out of bounds. Changing this culture – holding the staff to our ethical standards – was too great a challenge. We had to walk away from the deal.

Incompatibility in the Workforce

An incompatibility in the workforce may raise a different red flag. We found that the employees at another company were not very technologically advanced or trained in automation. Given our client’s highly sophisticated, automated and computer-led environment, upgrading the workforce would have required too drastic a change.

While these examples may help, there’s no clear rule about when to back away. Every strategic acquisition is slightly different and your reasons for saying “no” may vary from ours.

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Effective leadership plays a critical role in integrating companies following an acquisition. Challenges abound, for instance when disagreements arise between the executive team and the rest of the staff. How do you bridge the gap? Communicate painful decisions? Maintain calm during a period of change?

As the leader of an integration process, you should:

  • Be aware of the key challenges and opportunities
  • Recognize that different management styles can bring new value to the combined organization.
  • Be good listeners. Those who aren’t decision-makers need to be heard and to hear from their leaders in response.

Leaders who bulldoze their way through integration breed resistance within the acquired company and are likely to be frustrated by a lack of progress. This can be avoided by adopting a collaborative approach.

That isn’t to suggest that as a leader you should simply acquiesce, but rather that you balance the input of executives and employees and make decisions that best serve the interests of the organization.

Leaders choose which issues may be negotiated, and which are beyond discussion. They must clearly communicate how decisions will be made and how information will be disseminated.

Consider the challenges of integrating Kraft and Heinz following completion of their merger last July.  The Wall Street Journal reports Kraft Heinz is closing seven facilities, including Kraft’s former headquarters near Chicago, and cutting 2,600 jobs. In situations like that, leaders must make tough choices, combining two companies with strong cultures and entrenched staff. Cost cutting, innovation and automation may be essential to the success of the integration, but so is the way in which these dramatic changes are implemented.

The quality of leadership can make or break an integration program.

Culture can often be neglected simply because it is difficult to measure, especially when compared to hard facts such as number of employees or company revenue. After all, what constitutes a “good” culture? Definitions may vary from company to company and even among members of your own acquisition team.

Despite this challenge, company culture should not be ignored; it is an important characteristic of the acquisition target and a significant factor in the success of the transaction.

I have found the best way to measure culture is to use objective criteria and concrete metrics. This way, everyone on your acquisition team will be on the same page when evaluating a potential acquisition target. Below I’ve listed three example criteria to consider:

  1. Communication Style – Observe how employees and management typically communicate during the acquisition process. Is there truly an “open door” policy where all suggestions are welcome? Does it take a long time to come to a decision or does the company make decisions swiftly? Consider this communication style lines up with your own.
  2. Entrepreneurial vs. Mature Company – Is the original owner still at the company or does the seller have a professional management team? Also be sure to take a look at employee turnover, benefits and compensation. These items will give you a better understanding of the target’s culture.
  3. Conflict Resolution – Does the company have a formal process in place? If so, how does it compare to your own process?

There are, of course, other criteria you may wish to consider when evaluating the seller’s organization. And, there is no one right answer when it comes to measuring culture. Your criteria and metrics will be different depending on your strategic rationale for acquisition and you own company’s growth goals.

I’ll be discussing some more tips on measuring company culture my upcoming videocast on “Cultural Due Diligence” this Thursday, November 5. Don’t make the mistake of omitting culture from your M&A process.


Cultural Due Diligence Videocast
1:00 – 1:20 pm ET
November 5, 2015

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Culture clashes can make or break a deal. Just think about a few infamous deals that fell apart, such as the Time Warner-AOL merger in 2001. In Deals from Hell, Robert Bruner analyzes the reasons for failure in depth along, including examples of deals that failed due to cultural issues.

In fact, cultural issues are still cited as one of the top reasons for acquisition failure, which often means the breakdown comes at a late stage in the process. This is hugely wasteful. Clearly, there’s no point in closing a deal only to have it collapse during integration.

With so much at stake, it’s important to ensure a successful integration of the two cultures involved. Here are just some of the questions that arise:

  • How can you avoid culture clashes?
  • Should you only purchase companies that share a similar culture as your own?
  • How can you evaluate the culture of an acquisition prospect before the deal closes?

You don’t have to purchase a company that’s exactly the same as yours. In fact, you may be buying a business specifically for its unique culture. However, you should always conduct cultural due diligence when evaluating a potential acquisition to maximize your chances of success. The place to start that due diligence is on your own turf: Before you even evaluate the culture of a target company, you need to look within.  By understanding your own business culture you’ll be positioned to talk to the right people in the other company, and ask the questions that will give you valuable insights about its culture.

Learn more about what questions to ask and what to do with the information gained during cultural due diligence in my upcoming M&A Express videocast on November 5.

Cultural Due Diligence Videocast
1:00 – 1:20 pm ET
November 5, 2015

I’ll also be answering any questions you may have at the end of the videocast. I look forward to seeing you there.


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It seems as though the employee vs. contractor issue is popping up all over the news. Virtual assistant startup company Zirtual just fired over 400 employees by email because the company couldn’t sustain its payroll once it converted contractors to employees. The Wall Street Journal has also highlighted the many startups that are now grappling with some version of this issue.

The employee vs. contractor question needs to be considered during due diligence, especially as the issue becomes more common.

You may wonder, why does this matter? And if it’s so difficult to convert contractors to employees why are companies doing it?

“1099 Employees”

Many companies today have what we call “1099 employees,” which of course is an oxymoron. You can have 1099 independent contractors, or you can have employees. Unfortunately, some businesses have been treating contractors as if they were employees, primarily to save on costs like healthcare and benefits, which employers are required to provide for employees. It sounds like a good plan, especially for small startup companies with low margins, but you run into legal trouble when your “contractors” actually work as full or part-time employees.

If the company is employing “1099 employees” (contractors who should really be employees), and you are forced to convert them, the costs can be significant. The founder of Zirtual, Maren Kate Donovan, said in a LinkedIn post, “Simple math is add 20-30% on to whatever you pay an IC [independent contractor] to know what it will cost to have them as an employee.”

In addition, a business that is using contractors as if they were employees is exposed to myriad legal issues. Homejoy Inc., a startup cleaning company, was unable to raise more venture capital due to four lawsuits. The business was forced to close.

Take a Closer Look at Workers

A simple way to start your workforce due diligence is to find out how many contractors vs. employees work at the company. A lot of contractors at the seller’s company should raise a yellow flag. It doesn’t guarantee that something is amiss, but you should investigate further.

That’s not to say you have to walk away from a company that uses contractors, or even one that is using contractors as employees. It’s simply an area that needs to be explored. If contractors used by the company should really be re-classified as employees, what would it take to convert them? Does this change the deal for you?

One option is to convert all contractors to employees before the acquisition closes. If the problem is serious enough, you may even decide to walk away from the deal. Whatever you choose, return to your objective acquisition criteria before making your decisions.

People usually think about financial due diligence, but in light of recent news I encourage you to take a second look at the seller’s workforce. You don’t want to discover post-acquisition that all your contractors need to be reclassified as employees. Find out BEFORE you close the deal.

Q: “What if the buyer and seller functional leaders do not match? How do you coordinate the two sides?”

We take a functional approach to due diligence where we encourage your leaders from sales, marketing, finance, operations and other functional areas to meet with their respective leaders on the seller’s side. A functional approach ensures all important aspects are covered and explored during due diligence.

Due Diligence Buyer and Seller Interaction

Functional due diligence: Functional leaders from the buyer meet one-on-one with functional leaders from the seller during due diligence.

However, we often run into a situation where there are more functional leaders on the buyer’s side than on the seller’s because traditionally buyers tend to be larger than sellers. While you still want functional leaders from each side to meet, keep in mind you don’t want to overwhelm or intimidate the seller. I don’t mean take a soft or easy approach, but don’t have two or three of your functional leaders meeting with one leader from the seller’s side. It will feel like an ambush.

Identify which leader from your organization most closely aligns with their functional leader and pair them off one-on-one.  For example, while you may have accounting, HR and tax professionals, select only one of these leaders to meet with the individual performing all of these functions at the seller’s business. This approach will allow for effective communication between buyer and seller.

This question comes from our webinar “A New Thinking on Due Diligence.” Learn more about Capstone’s webinar series.

People are critical to the success of your company, and it’s no different in the business you are acquiring. But how can you go beyond the surface and find out what employees really think? It is doubtful employees will be completely open and honest when asked point blank, “Do you like your job?”

One of the best sources of information when conducting human resources due diligence are employee satisfaction surveys, especially those conducted by a third party. These surveys are not only telling about employees but also about management and the organization as a whole.

Review historical employee satisfaction survey results and look for key metrics and trends. It’s also wise to look at remediation – how has management responded to complaints in the past? This may provide insight into the management team, working styles and organizational culture.

When we’re consulting on integration, one metric my firm looks at is turnover. Is there high turnover within a department when benchmarked against this industry or the rest of the company? If so, why is this happening? In certain situations of unusually high turnover, we found that the department manager had been there forever but was an ogre to work with. Anyone with any intelligence who came into that department pretty much got run out because the manager felt threatened!

You can also discover “green buckets,” or opportunities, within the survey results. If employees are dissatisfied with their old computers, now may be the time for an upgrade. In one case we noticed employees had really old monitors. We found that the owner had upgraded the computers, but viewed upgrading the monitors or keyboards as unimportant. For our client, it was relatively inexpensive to purchase new monitors and employees were very happy with the upgrade. Look for these opportunities to form a positive relationship with your new employees.

An acquisition can cause anxiety for employees. Anything you do as the buyer that says “We care about you” will help reassure employees and make for a smoother integration process.

Due diligence is about more than just looking for red flags and hammering the target for more and more information. Learn how to use due diligence to maximize the opportunity for success in your next acquisition. Join me for a webinar on “A New Thinking on Due Diligence.”

Date: Thursday, May 21, 2015

Time: 1:00  – 2:00 PM ET

Due diligence has traditionally been seen as a “check the box” exercise, but a new way of thinking about due diligence will allow you to find opportunities to boost the likelihood of success for a deal.

After completing this webinar, you will be able to:

  • Describe how to organize due diligence to maximize efficiency and get the information you need to move the deal forward
  • Define what items to look for by key functional areas (sales, marketing, HR, IT, etc.), including financial due diligence
  • Explain how items uncovered during due diligence can affect deal structure and terms
  • Utilize tools to organize due diligence findings

CPE credit is available.

Click to learn more and register.