An acquihire is not just a transaction. It is a driver for growth while hiring a team from a market leader with a winning edge. Acquihires involve the acquisition of other assets, besides the talent as well. Based on how the deal is structured, well-funded companies target developer teams from leading brands and hire a team to scale rapidly.
An acquihire requires a certain amount of due diligence by the buyer. Before committing to any transaction, the IBID acquisitions team always focuses on knowing more about the target company in terms of not just positive factors, but also the nature and extent of obligations, liabilities, litigation risks and more. This is essential in the acquihire of any company. Here are the most significant business and legal due diligence activities that the IBID acquisitions team ensures it follows.
#1 Understanding the Finances
Buyers will consider the target company’s historical financial statements and related metrics and the projection of performance as well. However, successful IBID acquisitions go beyond that for several reasons. The first question to ask is what do the company’s annual, quarterly and monthly financial statements for past three years show.
Does it reveal a positive financial performance and condition? Next in line is studying the financial statement audits and whether these reflect current as well as contingent liabilities. Also on the anvil is considering if the margins for the business are growing or falling aside and the company’s projections for the future.
The company’s projections for the present year as against the board-approved budget, the normalised working capital necessary to run a business, the working capital, capital expenditures and other investments also matter.
The IBID acquisitions team also considers capital expenditures to be made, the company’s present capital commitments, conditions of liens and assets thereof, indebtedness that is outstanding or guaranteed by the company and revenue recognition issues or accounts receivable matters. Capital and operating budgets, EBITDA and the requirement of financial resources in question for the target company also form part of the due diligence process.
#2 Decoding Technical Aspects
The IBID acquisitions team also considers the extent and quality of the intellectual and technology properties of the portfolio company prior to the acquihire. This includes pending patents, whether IP interests are protected, registered and common law trademarks as well as service markets the company has, copyrighted material, and any infringements. Technology in-licenses and exclusive technology licenses to third parties, as well as use of open source softwares or coding efficiencies are also considered. Source or object code escrow arrangements, indemnification and encumbrances on intellectual properties are also considered.
#3 Customers and Sales
The acquisitions team also considers the sales pipeline and the target company’s customer base. Topics of concern include top customers and revenues generated from these, customer concentration issues and risks, post acquisition customer retention, customer satisfaction levels, customer backlog and of course, the sales volumes.
#4 Strategic Fit
Another consideration for the acquisition team is the examination of the future performance of the target company as a stand-alone business and the synergies when it fits strategically post the acquihire. Related areas of inquiry include whether there exists a strategic fit between the company and the acquirer and the perception of the fit is based on historical business associations or future projections.
Additionally, the business also studies if the company provides products, services or technologies the buyer wants to excel at. Retention post the acquihire and how integration will be attained, how long the process will take and the extent to which it would cost would also be considered. Marginal costs generated by the acquisition also need to be taken into account, as well as revenue enhancements post the acquisition.
Tax matters also need to be considered before an acquihire. This depends on the tax liabilities the company may have accrued over time. But even in the absence of historical tax obligations, a scrutiny of tax matters is a must. Due diligence in this context will cover tax returns, government audits, tax sharing as well as transfer pricing agreements, copies of correspondence, net operating losses or credit carry-forwards, agreements regarding tax statutes of limitations and settlement documents.
As part of the due diligence for an acquihire, the deal team also studies the marketing arrangements and strategies of the target company. It reviews sales rep, distributor, franchise and agency agreements. It also considers the marketing collateral including catalogues, price lists, purchase orders etc. Surveys of the market the company serves or plans to service and press releases are also part of the perusal.
#7 Competitive Landscape
The IBID expansion team also studies the competitive environment in which the portfolio company operates, including current and anticipated principal competitors, technologies that have made current technologies or manufacturing processes obsolete and the benefits of the company’s products as well as technologies compared to competitors.
Regarding the Disclosure Schedule
Finally, the disclosure schedule needs to tie in with the deal agreement. Material contracts and amendments along with counterparties and dates must be listed. Review of all contacts, issues and pending patents and consents from counterparties required, if any are also considered. Litigation and its analysis form the core of judging the viability of the acquihire during the due diligence process. Thus, the disclosure schedule confirms the various aspects that must be reviewed before the acquirer commits to the acquihire.
An acquihire, therefore, requires a lot of due diligence by the acquisitions team, apart from the counsel and accountants. Being prepared for the due diligence activities can ensure the target company is scrutinised smoothly and seamlessly for judging if it is the best fit for an organization. The IBID Group focuses on serving interests of both parties to the transaction and scripting an acquihire that translates into mutually beneficial, win-win outcomes.
The IBID Group is oriented towards value creation more than anything else. While valuation forms the core of due diligence, so does understanding the competitive landscape and whether the target company is the best fit. This is what makes a difference to the final outcome of an IBID acquihire and ensures it is an outstanding success.