Management Clinic - Due Diligence: What's in the box?

There is a two-word answer: due diligence. If you are borrowing money to finance the deal, the lending source will want to be as equally assured as you that the target firm is indeed what it has told you it is.

Statutory regulatory issues aside, the following represents the practicalities that you should be aware of.

It is true to say that in the past many deals were done because a dominant board member wanted to do the deal. These days, people need to be more sanguine or circumspect and ensure, as far as possible, that the deal is a good fit for the acquirer before going too far down the road.

The vendors will have given you a good story and without that you would not be interested, yet knowing that their assessment of the business measures up when looked at objectively is the real key.

Key questions
Ask yourself: how good is the target company's regulatory compliance regime, training and competence scheme, handling of client money, sales process, track record of complaints and professional indemnity claims, just to flag up a few areas.

All of these factors and more will need to be reviewed, as will areas such as employment contracts and what liabilities you will be taking on under transfer of undertakings (protection of employment), for instance. This is by no means a definitive list.

You also need to ensure the target firm is up to date with some of the newer Financial Services Authority thinking: what it has done, for instance, about commission and capacity disclosure, corporate governance, The Bribery Act and The Proceeds of Crime Act. A progressive firm will have covered these areas.

There is plenty to consider and you could do it all yourself, though that is fraught with difficulty because, if the matter is confidential and you are recognised, staff will pretty soon put two and two together. Compliance firms are often engaged to carry out this work and submit a report to the acquirer or intended lender. Doing this, you will receive an objective report on the health of the target.

Ian Richie is director at RWA