Michael D. Moberly May 24, 2012
It’s important for management teams, c-suites, and boards to recognize that merely because a deal or transaction has progressed to the due diligence stage, there is absolutely no guarantee the projected values, synergies, and competitive advantages the targeted assets are projected to bring, an increasing percentage of which will be intangible, will sustain those projections.
In today’s globally competitive, aggressive, and predatorial business transaction environment, it is quite naïve in my view, to assume the full control, use, ownership, value, and materiality, etc., of the targeted assets will remain fixed throughout the transaction period without close monitoring and risk mitigation in both pre and post transaction (due diligence) contexts.
In large part, that’s because a potential, but, I might add, an increasingly routine by-product of business transactions is that they produce uncertainty at all employee levels as well as among stakeholders and investors. Uncertainty, individually or collectively can, influence individuals to assume demeanors, exhibit behaviors, or engage in acts that otherwise are considerably less likely if/when uncertainty is not present.
Put bluntly, uncertainty can manifest itself in many ways, some of which are adverse when change (i.e., a business transaction) is pending or eminent. Too, in business transactions and the uncertainty it frequently sparks, can manifest as asset compromises, misappropriation, and/or undermining of competitive advantages. Perhaps more so when due diligence teams are dismissive, unaware, or conclude the monitoring necessary to prevent or mitigate such circumstances is beyond (beneath) their mandate. That’s irrespective of evidence that suggests asset vulnerability elevates during periods of (company, employee) uncertainty. To be sure, commencement of due diligence is well-recognized as an indicator that change (and uncertainty) within a company and/or business unit are fully under consideration or eminent.
What’s more, uncertainty, and the various ways/contexts it manifests, can occur in rapid-fire order and cascade throughout a company. Due diligence team ‘radar’ should surely recognize any adversity and modify the way due diligence will be structured and executed. This is especially relevant if the transactions’ envisioned (projected – desired) economic and competitive advantage benefits decline.
Admittedly, I am not an advocate of using the uninitiated or inexperienced to conduct due diligence. It is far too important. Neither do I subscribe to the view that there is a one-size-fits-all template (for efficiency sake) to conduct due diligence.
So, for those, and other considerations, some of which are described below, I have identified various issues that should definitely be on the radar of every due diligence team. Any one of the following for example can be a signal that a higher probability exists that a transaction will be successful, i.e., is there evidence of:
1. a broad company culture that genuinely recognizes the value of the core (revenue – value producing) intangible assets?
2. consistent stewardship, oversight, and management of those assets?
3. consistency in the representation of those assets, ala Sarbanes-Oxley, FASB, etc., in which (asset) risk, value, materiality, and financial performance are measured and accounted for?
4. business continuity-contingency (organizational resilience) planning that includes the due diligence targets’ core intangible assets?
5. strategic – internal planning and execution that achieves recognition and utilization of intangible assets as source of value, revenue, and ‘building blocks’ for growth and sustainability?
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