Key Due Diligence Items to Vet Before Your Next Acquisition
The M&A market has seen unprecedented transaction volume in 2021. As the direct impact of COVID-19 on the financial markets has lessened, corporations, financial sponsors, and private investors are spending their earmarked cash as fast as they can.
Lower middle-market companies are being scooped up by investors that see an opportunity to combine like-minded companies into a new platform.
The execution of this investment plan can be derailed if the following business qualities are not fully vetted by investors before making an acquisition:
Quality of Management
Strength of Management is typically the reason the target has a successful track record. An investor must consider and determine if current management will either be an asset or a liability once acquired.
Quality of Earnings
Accounting has various guidelines to how it can be applied, which means there are many ways for financial records to be presented. An investor must understand how a target is currently recording its financials, earnings its revenue, and classifying its costs to properly understand the true earnings of the business. If this assessment is overlooked, there is a risk of purchasing a company that has an earnings level much lower than originally anticipated.
Quality of Assets & Systems
Many small to medium size businesses have significantly aged assets and obsolete systems within their current business. Even though these have worked previously, new ownership may unexpectedly find that capital expenditures and system upgrades need to be made to scale the business.
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