Performing a Stealth Due Diligence Facilitating Buyers Negotiations

An international software business suffers from deteriorating financial performance. Company management has run the company over 30 years and recently bought out the founding shareholder. The management buyout, partially through a vendor loan, had been facilitated by windfall profits from a court case. These cash benefits, caused the former owner to retire wealthy and independent, and the management being cash rich as well.

The windfall had blurred the insight and oversight over the business. Now 4 years down the road there was a lack of cash generation. The decreasing ability to pay of the vendor loan made management vulnerable to sell to an interested third party. The third party needed assurance on the cash generation potential of the business and requested a due diligence. For several reasons both parties could not afford to spread the knowledge of a potential transaction to staff and clients. The due diligence needed to be performed in stealth mode.

Due Diligence Performed

There is several way’s to perform a due diligence, but how to obtain some sort of assurance and valuation in a highly secretive deal stage. One would consider to have auditors review financials How valuable are financial statements, in a company where the value is captured in license contracts and related client specific software development projects? To value the businesses one needs strategic and operational information from key staff in operations and commercial management

A solution was found in introducing a business process improvement consultant. Under the cover of a business process improvement project the company was evaluated from a strategic, commercial, technical and financial perspective. A Stealth Due Diligence. All functions area’s had been evaluated including a confirmation of the balance sheet at the recent year end. An in dept Q&A had been done on software development processes, commercial pipeline and license and project portfolios. Conclusions had been validated with respective key management. Separately for the client, the functional assessments where translated into a cashflow projection that revealed insight on the long and short term cash potential.

A better understanding then the owners…

The Due Diligence lead to comprehensive Strengths, Weaknesses, Opportunities and Threads analysis which then was converted into a strategic value & risk assessment on the transaction. The assessment pointed out critical risks in the business portfolio and provided cashflow projection. These projections turned out to be much more accurate then the management reported themselves and their cash generation expectations. Here was the benefit of the exercise. Understanding the business better then the owners allowed the potential buyer to “wait and see”. The buyer, anticipating the cash position to deteriorate further, now could predict the best point in time to make an offer for the business.

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