|
Due Diligence and the Percentages of Doing Business
Beating the percentages with careful planning and extensive due diligence
By: Bruce Bahlmann - Contributing Author (your
feedback
is important to us!)
Created:
July 4, 2007
Check out
Birds-Eye.Net industry proven due diligence checklist for your next
due diligence exercise: use the resource trusted by fortune 500 companies!
Due diligence is a way of life for businesses of all types. Whether you
are a banker, real estate broker, venture capitalist, angel investor, or
serial entrepreneur the name of the game is know the percentages going in
and above all complete due diligence to ensure the lowest possible risk for
your investment. The following is just a small sample of various types of
due diligence performed:
- Business: Buying an existing company or investing in a new company
or division
- Real Estate: Buying an existing property or developing a new
property
- Equity Investment: Buying stocks or diversifying a portfolio
- Finance: Loaning money or raising money
- Software: Developing a new application or further developing an
existing application
- Intellectual Property: Improving an existing issued patent,
determining licensing strategy, or filing patents on new innovations
- Human Resources: Hiring new employees or training existing employees
to take on new roles
|
30% of mergers don't make a difference and 53% of
companies actually lost value in the process of acquiring (KPMG) |
Business Due Diligence
Due diligence most often associated with creating or acquiring a new
business. Creating a great business is 1% inspiration and 99% perspiration -
so many founders of companies perform due diligence within their area in
order to attract investors (e.g. angel investors and venture capitalists).
In the case of a Venture Capitalist (VC) the minimum investment they are
looking for is a company with a projected annual return of 25% and the
potential of earning 50-100% per year. Although the average VC will
generally give a company between 5 to 7 years to realize such a return,
their patience or lack of progress by management or a down turn in the
market can impact how long they continue to bankroll any company. As a
result, knowing the potential of any innovation is but a fraction of the due
diligence performed by angel investors and VCs on prospective companies. The
likelihood of a new company getting funded often has less to do with the
actual innovation and more to do with the founder, the experience of his
management team, and his history in building successful companies.
Real Estate Due Diligence
Another area where due diligence is performed is real estate
transactions. Just like any investment, real estate requires extensive
investigation to ensure the maximum possible return. Only unlike a business
due diligence, real estate transactions cover many different disciplines
including: architectural, financial, environmental, insurance, tax, soils,
survey, traffic, title, and market. The problem with real estate is that it
is also very broad with many different sectors including: commercial,
retail, industrial, residential, storage, agricultural, and so on that
expertise in the above disciplines is often limited to one particular
sector.
Table 1.0 below provides a breakdown of some of the known costs,
timeframes, commitment fees, and success rates of various forms of due
diligence.
| Due Diligence Types: |
Costs: |
Timeframe: |
Commitment fees: |
Success: |
Notes: |
Sources: |
| Business: Acquiring an existing company |
8% or more |
30-90 days or more |
10% |
47% |
na |
KPMG |
| Real estate: Buying an existing property
|
3-6% of deal or $25k-45k |
7-21 days or more |
na |
na |
Less title insurance |
na |
| Real estate: Developing a new property |
3-6% of deal or $60k-90k |
na |
na |
na |
Less contractor and architect
fees |
na |
| Software: Developing new products |
0.5% or more |
varies |
varies |
45% |
na |
Software Marketing Journal |
| Finance: Loan |
$2.5k-25k |
na |
1% |
na |
na |
na |
Table 1.0 Due Diligence Comparison Chart
Pre-Employment Due Diligence
Pre-employment due diligence is gaining a lot of attention from
businesses. According to the department of labor, 50% of employee resumes
contain factual errors, 75% of all employees of the banking industry have
stolen from at least once from their employer, employee theft and fraud cost
retail businesses 50 billion a year - the average value of merchandise
recovered from employee theft is $1,525 - nearly 7 times that of the average
shoplifter, and perhaps most alarming is the fact that 1.2 to 2 million
workplace violence incidents happen each year.
Yet in spite of these figures, less than 33% of all companies actively
complete background checks on employees and less than 29% of these companies
have ever run an audit of their screening provider to check the quality of
their screens. In one instance, a hospital with 12,000 employees performed
its own independent 7-year pre-hire re-screening to find 198 unknown
pre-employment felonies, 74 post employment felonies, and an average 14 new
employment relevant events per year. While the re-screening only turned up
excessively negative for 2.26% of the hospital's workforce, the extent of
the oversight cannot be understated. Take FedEx corporation which was sued
for negligence when one of its employees with a history of child sexual
abuse was charged with sexual assaulting a customer's son.
Summary
|
50% of the acquisitions by companies with sales up
to 350 million are successful (Boston Consulting Group) |
In some respects due diligence and the exercise of researching a
given business opportunity may be perceived as an additional expense that
satisfies the company's bean counters. However, when looked at purely from a
business strategy perspective due diligence takes on more of a necessary
litmus test of whether any given business opportunity is indeed as good as
it seems. With the percentages being what they are (less than half the
acquisitions completed actually result in increasing the value of a given
company) it costs less to complete the due diligence than reverse a
completed acquisition gone bad.
Check out
Birds-Eye.Net industry proven due diligence checklist for your next
due diligence exercise: use the resource trusted by fortune 500 companies!
For a list of Venture Capital Firms check out
VC Directory
Can Birds-Eye.Net help you or your Company?
Receive your Birds-Eye.Net articles and white
papers hot off
the presses by adding our RSS feed to your reader.
|