The Art and Science of Due Diligence

Guest Article Overview: The Art and Science of Due Diligence By Andrew J.
Sherman, Author of The AMA Handbook of Due Diligence Due diligence is not just a
process, it is also a reality test -- a test of whether the factors driving the
deal and making it look attractive to the parties are real or illusory. Due
diligence is not a quest to find the deal-breakers but a test of the value
proposition underlying the transaction to make sure that the inside of the house
is as attractive as the outside. Once the foundation has been dissected, it can
either be rebuilt around a deal that makes sense or allow the buyer to walk away
and prevent the consummation of a deal that doesn't make sense. Overall, the due
diligence process, when done properly, can be tedious, frustrating,
time-consuming, and expensive. Yet it is a necessary prerequisite to a
well-planned acquisition, and it can be quite informative and revealing in its
analysis of the target company and its measures of the costs and risks
associated with the transaction. Buyers should resist the temptation to conduct
a hasty "once over," either to save costs or to appease the seller. Yet at the
same time, they should avoid "due diligence overkill," keeping in mind that due
diligence is not a perfect process and should not be a tedious fishing
expedition. Like any audit, a diligence process is designed to answer the
important questions, and ensure with reasonable assurance that the seller's
claims about the business are fair and legitimate. Proper due diligence involves
knowing: - where to look - what to ask - what tools to use - who to ask - how to
test premises/answers - who should ask Effective due diligence is both an art
and a science. The art is the style and experience to know which questions to
ask and how and when to ask them. It's the ability to create an atmosphere of
both trust and fear in the seller, which encourages full and complete
disclosure. In this sense, the due diligence team is on a risk discovery and
assessment mission, looking for potential problems and liabilities (the search),
and finding ways to resolve these problems prior to closing and/or to ensure
that risks are allocated fairly and openly after the closing. The "Art" of Due
Diligence: - Understanding how to extract key information from a person or
situation - Understanding the objectives of the parties and the underlying
transaction - Identifying key hurdles and risks - Identifying why information
might be falsified or omitted - Targeting the proper sources for disclosure of
information The science of due diligence is in the preparation of comprehensive
and customized checklists of the specific questions to be presented to the
seller, in maintaining a methodical system for organizing and analyzing the
documents and data provided by the seller, and in quantitatively assessing the
risks raised by those problems discovered in the process. The "Science" of Due
Diligence: - Do your homework - Be prepared and well-organized - Be precise in
your requests - Be persistent in your quest for the truth - Don't accept the
first answer as the final answer Excerpted from The AMA Handbook of Due
Diligence by William M. Crilly and Andrew J. Sherman. Copyright © 2010 William
M. Crilly and Andrew J. Sherman. Published by AMACOM Books, a division of
American Management Association, New York, NY. Used with permission. All rights
reserved. http://www.amacombooks.org/ Author Bio Andrew J. Sherman, is the
author of several books, including The AMA Handbook of Due Diligence, Harvesting
Intangible Assets, Mergers and Acquisitions from A to Z, Raising Capital, and
Franchising and Licensing. He is a partner in the Washington, D.C. office of
Jones Day and a top-rated Adjunct Professor in the MBA and Executive MBA
programs at the University of Maryland. An internationally recognized authority
on the legal and strategic aspects of business growth, he is frequently called
upon by the media to share his expertise. He has been featured or quoted in The
Wall Street Journal, USA Today, The New York Times, BusinessWeek, Fortune,
Investor's Business Daily, Forbes, Entrepreneur, U.S. News & World Report, and
other prestigious publications. For more information please visit
http://www.amacombooks.org/book.cfm?isbn=9780814413821