Perhaps because the term "due diligence" does not have a good translation in Polish, its purpose and value added is not always properly recognized.
When acquiring a company, the purchaser usually performs a more or less extensive examination. Most frequently, it refers to the financial, tax and legal condition of the enterprise. It is aimed at identifying potential weaknesses, issues and threats existing at the company, which are not necessarily visible from outside. It serves as an independent verification of the picture presented by the seller. Its results can be highly useful when negotiating the terms of the deal, including price. That is why the value added by due diligence process is commonly attributed to the value of cash savings. Indeed, it is often the case: statistically, the level of revised offers tends to be lower than that of initial offers. However, it must also be noted that sometimes the identified risks are of such material nature that the purchaser withdraws from the deal. You can say that a proper due diligence review is a policy insurance against entering into a deal, which would subsequently be regretted.
With the exception of small deals, the due diligence review is outsourced to specialized advisors, who – thanks to their tools and experience – are more effective and, first of all, know where and what to look for.
Industry player conducted talks relating to acquisition of a 60% stake in a specialized IT service provider. Initially agreed terms defined the purchase price as a multiple of 7 times the EBITDA (operating profit plus depreciation) of the company for the last 12 months. According to the company data the EBITDA amounted to PLN 10m.
The due diligence review identified, however, a significant issue related to one of the biggest customers, accounting for 25% of revenue. Invoices issued to this company within the last half a year have not been paid and discussions with the sales people revealed that for two months they have had no contact with the customer. As a result the purchaser requested to revise the initial terms of the deal. Finally, parties agreed that the basis EBITDA shall be decreased by the part earned on the lost customer. Thanks to that the purchaser paid for the stake PLN 10m less than he originally planned.