5Qs: Patrick O'Keefe on the Importance of Due Diligence When Buying a Business

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Pat O’Keefe, CEO of O’Keefe and Associates, a business consulting firm with offices in Bloomfield Hills, Grand Rapids, Chicago, and Atlanta, spoke with DBusiness Daily News about what considerations potential buyers should look for when vetting an acquisition opportunity.

1. DDN: What are the most critical issues to research prior to buying a business?

PO: The first issue is sustainability of earnings. Businesses are often priced on their future capabilities to generate earnings, so they need to do an analysis to figure out at what level the company can sustain its operations. And that involves analyzing a lot of risk factors. It could be risk factors within the customer base, maybe challenges that may cause a lower demand for the company’s product. It could be competitive forces that are entering the market that may not have been there historically and could negatively impact future earnings prospects. It could also be technological challenges (where) a company’s product may be obsolete.

2. DDN: What other factors are important?

PO: Looking at whether a company buys assets or stock, you might be concerned about liabilities the company may have. Some that are not so apparent can relate to warranty or environmental risks, things that might not be so readily apparent on the company’s financial statements. Due diligence could take as little as 30 days to as long as six months, depending on how well the buyer understands the acquired business.

3. DDN: How important is it to evaluate the current owner’s role in managing the company?

A lot of times, the business has been driven by a founder or a key person who has different goals and objectives after his company has been acquired in terms of the time that he wants to devote to the business. The buyer has to assess, 1) does he have the internal resources within his own organization to make that transition happen, or 2) must he rely on the target’s management team to pick up the pieces after the key person within the organization leaves.

That assessment is crucial for a lot of reasons. One is if a company is technology based and the owner understands the technology better than his management team, that can create a void when he leaves. That is also true of key customer contacts that are doing business with them because of previous relationships. When that reason no longer exists, the buyer’s ability to continue to attract that business may become more of a function of price than the relationship.

4. DDN: Do you find that buyer’s sometimes place too much importance on certain criteria?

PO: I don’t know that you can ever have too much. A company interests a buyer for a particular reason, so initially the buyer is interested because the acquisition target gives them a competitive advantage or a synergy that they can’t grow organically through their own organization. Most buyers generally want to do the transaction, so the issue really is getting over initial euphoria over wanting to do a deal and making sure its a good deal. Not all deals are good even if they fit some of the company’s acquisition criteria.

5. DDN: What challenges might arise after the transaction is complete?

PO: Buyers typically understand why they want to buy a particular target, but they need to make sure those reasons still exist after they do the due diligence. Many companies will make a good acquisition under a set of synergies that they don’t devote the time to get post acquisition, which leads to them overpaying. For instance, if they (planned) a workforce reduction because of redundancy in general administrative functions, and they don’t aggressively pursue that after the acquisition, then they’re carrying a lot of (extra) overhead. They don’t have the same profitability they expected when they wrote the transaction. The post acquisition transition is extremely important.

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