Kick the Tires or Put Out Fires: Why Due Diligence Matters

Welcome to the October 2021 edition of our newsletter!  In this issue, we’ll examine the need for due diligence before considering a transaction, especially mergers or acquisitions.

Getting in on the Ground Floor: Essentials of Looking Into New Companies

Supply chains frayed or broken.  Labor markets struggling under the effects of once-needed economic stimulus which is now among several reasons many aren’t returning to work. These twin crises, and others, present opportunities for companies, many of which have adapted nimbly in the last 18 months.  For those on strong financial footing, the chance also exists to grow and innovate by acquiring smaller players, who could hold innovations that would take years to develop in-house.

But risks remain to large companies swooping in to acquire promising new ventures and their technology.  In addition to corporate culture concerns and the viability of the target company’s products, the “who” of a company that you’re acquiring is as important as the “what.”  Especially among early-stage companies in complex fields like biotechnology, we’ve seen many instances where investors were burned after unproven executives made bold claims which, after belated due diligence, were found to be untrue.  In other instances, company executives have purposefully inflated revenue projections when soliciting investor capital, leading to profoundly overstated valuations.

All of which leads to an old adage which should be applied to new companies: character counts.  Assessing the feasibility of revenue projections is a daunting task which likely requires a team of forensic accountants and other experts.  But other due diligence is also required, including a thorough vetting of executives and, especially for young companies, their advisers and early investors.  What do their histories tell you about the likelihood of future success/ Are their interests aligned, or will some parties make a quick exit once their goals are met, leading to “brain drain” or a loss of financial backing?  By taking a deep dive into the people behind a new company, as well as understanding its technology and potential for success, your clients can be better positioned to make good long-term decisions, even in fields where “long term” is measured in months, not years.