Due Diligence, It’s Priceless!

Corporate Finance & Restructuring

July 15, 2019

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In this article, our corporate advisory expert Mike McCreadie shares his experiences of why conducting due diligence is priceless in any business acquisition.

I often hear from parties looking to make an acquisition that they can’t afford to hire external due diligence support (in terms of cost and or time), or they know the business and can do it themselves. My response is often, can you really afford not to do the appropriate level of due diligence. Three examples demonstrate what I mean.

Client X approached FTI Consulting to discuss problems he was having with one of his businesses. Turns out it was acquired within the last two years. The client admitted that he had not engaged any support to conduct due diligence other than his legal advisors to assist with the sale and purchase agreement. He took on approximately $10m of debt over the past two years to acquire and then keep the business afloat, with much of the $10m including personal guarantees. Unfortunately, given the state of the business and the potential for insolvency it was agreed the business needed to be placed into formal administration, which ended up in liquidation. The client is still dealing with personal guarantee issues arising from the liquidation and in what has turned out to be a very expensive investment.

With hindsight the client readily admitted to underestimating the running costs of the business and the capital investment required, while overestimating the profitability of the business as a sustainable operation, all of which cost them dearly. All the challenges identified by client X would have been picked up through a due diligence process.

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