What lies beneath

With values falling, cash-rich companies face an abundance of attractive business opportunities, but will they get what they pay for? Mark Dunne reports

With values falling, cash-rich companies face an abundance of attractive business opportunities, but will they get what they pay for? Mark Dunne reports

Marc Bray is in demand. The operations director of software consultancy Totalamber tends to work with companies to ensure they are using the right IT systems, but he’s increasingly being approached to provide an additional service: reports on targets for rival businesses poised to strike.

“One of the areas we’ve worked in recently is operational due diligence,” Bray says. “We’ve been called in to analyse the operational IT systems for companies that are involved in M&A.”

He claims that the firm has seen a rise in demand for operational due diligence reviews from acquiring and target companies since the start of the year. “Even before the recent events in the banking sector, we experienced quite a lot of interest in our due diligence services from people acquiring businesses or companies that are about to be bought.”

Method man

Bray claims that companies are able to conduct the same due diligence reviews that his firm provides, but sounds a note of caution. “If you are about to make an acquisition or if you are being bought, this sort of work will take you away from your day job,” he says.

“You don’t want internal resources tied up doing due diligence, which they are probably not trained or experienced to do.”

When working on a due diligence review, Bray examines four areas: strategy, processes, people and technology. “The strategy forms the basis of how we review the rest of the systems,” Bray explains.

“We went into a company recently that was about to be acquired and found that there would be a considerable impact on their HR payroll system as the number of users would increase. They weren’t licensed to support the increased number, which was going to add a significant cost to the integration plans.”

He then takes a look at the processes that operate the systems. “Modern systems automate a lot of procedures and companies are starting to take that on board. The automation system has become quite an important feature for many businesses as they look at methods of cost-cutting, as it can bring considerable savings.”

Bray then has to decide whether the company has the right people in place to support, administer and maintain its systems. In particular he needs to know what the impact of the deal will be on these people and whether their numbers need to be reduced or increased.

The technology review includes noting what application is being used and if there are any third party service providers involved. He has to establish what application needs to be implemented and the impact it will have on the business.

Bray is convinced demand will continue to rise next year, as he doesn’t see any shortfall in the firm’s workflow.

“We are expecting an increase as lots of businesses begin to hit problems and there will be companies ready to buy them.

“So they will need to do due diligence, the analysis and a strategic review of the companies that they are about to buy,” Bray adds. “We definitely see it growing.”

Due diligence

Are there hidden dangers in your acquisition portfolio?
By Kevin Clarke, of 4See Risk Management

Anyone conducting due diligence with a view to a merger or acquisition will automatically consider such areas as financial performance, current order book, asset and property values, and perhaps even intellectual property protection.

That’s all perfectly sound, but it does leave an area of significant vulnerability, health and safety.

I know – the very words ‘health and safety’ can be enough to provoke a collective sigh in board rooms across the country, being often the butt of jokes and red-top horror stories – but when it comes to assessing a business with a view to acquisition, it is not an area to be overlooked lightly.

Ask yourself: “Do I have a clear understanding of how effectively health and safety is being managed within the target company? Is their performance above or below average in this area?”

These are just a couple of the questions that must be answered if you are to fully understand the liabilities of a company. Consider the possible ramifications – whatever health and safety liabilities exist – you will acquire them along with everything else.

For example, there may be an accident investigation pending; a legal or civil action being taken; or – even worse – an incident that has not been fully investigated, perhaps even deliberately swept under the carpet so as not to influence negotiations.

Some companies may appear to have all the right systems and procedures in place, yet may still be fostering a poor health and safety culture where the workforce has little or no respect for the rules. Make no mistake, these issues can cost serious amounts of time and money to resolve.

Even if the discovery of any negative issues would not deter you from your acquisition or merger – it might make you reconsider the price you are willing to pay.

Thankfully, more and more companies are becoming aware of the need to assess the vulnerability of target companies in this area, and are beginning to give health and safety due diligence the level of attention it deserves.

Priority should then be given to sourcing the expertise and experience to know exactly where to look and what to ask, ideally from someone who won’t just tell you what’s wrong, but how much it would cost to put it right.

That way, you can complete the deal knowing there isn’t something lurking in the shadows, just waiting for you to assume responsibility before coming out to bite you!

For more information about health and safety due diligence audits and gap analysis during the acquisition process, visit 4seerisk.com, or call 01327 811822.

Employee benefits

Jim Tennent of Kudos Independent Financial Services on how auditing benefits packages can boost your business

In the current economic climate, businesses should be doing everything they can to keep costs down and reduce financial risk. What many companies do not realise is that, when left unchecked, employee benefits packages may be doing just the opposite.

Companies create their benefits packages based on solid advice from trusted independent financial advisors, but failing to review the situation periodically can lead to a host of problems.

Re-evaluation of your employee benefits package is essential and can highlight any new risks and liabilities, which may have emerged since the original plans were drawn up.

The key aspect of any audit is to analyse how your staff perceives the company’s benefits scheme. An ineffective scheme can affect employee retention and attraction if not caught early. If your benefits package isn’t up to scratch, not only will your employees start leaving and you will find it difficult attract new ones. Current staff may not be aware of the full extent of their benefits, or may be unhappy with perceived poor value; potential employees may be being driven away because the benefits package isn’t properly explained to them.

An independent audit from a financial services company can resolve some of these issues and ensures your employee benefits scheme runs smoothly and cost-effectively.

Typically, an audit highlights any unforeseen risks within benefits packages and advises how these problems can be mitigated. It only takes one administrative slip-up to create a potentially huge financial and legal problem. In many cases, catching this kind of problem early on can prevent unexpected – and expensive – liabilities from cropping up in the future.

Benefits packages have a large HR function, often costing companies through management time and cost effectiveness. When an audit is carried out, a thorough cost analysis is performed; the resulting advice can show how elements could be better streamlined, or replaced entirely to offer the same – or better benefits – to employees, while saving the company money.

CM-Logic on software due diligence

Software Intellectual Property (SIP) is now recognised as the most valuable asset of major global organisations. Managing any potential identifiable risks and vulnerabilities is now regarded as a must on the list of requirements presented to financial directors.

Maintaining business continuity with automated monitoring and stringent management is paramount. Heads of business no longer ignore the inevitable, but take all the necessary steps to counteract IP disasters.

Using the resources of CM-Logic Ltd, a £33 million deal was completed when PicSolve International underwent a management buy-out, backed by Fidelity Equity Partners and supported by RBS.

CM-Logic provided software IP assessment services tailored toward the due diligence process. Before final negotiations could take place, Black Duck’s Protex product was used to analyse the software source code to determine the mix of any open source and third party code contained within. Parties needed an understanding of the content of the code base being acquired in order to reduce the business risk and expedite the transaction.

Five years ago, a survey reported that 80 per cent of commercial software products would include elements of Open Source Code by 2010. One can only speculate at what today’s numbers might be. Today, Open Source Software is an acceptable development resource and with CM-Logic Ltd and Protex you’re able to control the risks rather than fear them.

On the ground

Thomas Herr of THProjektmanagement discusses the firm’s role on German property deals

THProjektmanagement (THP) is a consultancy firm based in Berlin, which is focused on identifying, monitoring and controlling the costs and risks of real estate investments.

The firm was involved in more than 10 per cent of all commercial property deals in Germany from 2005 to 2007, working with acquirers and vendors, and is the only owner-managed consultancy firm to be listed in the top five of German technical real estate due diligence providers.

As well as supporting clients through the acquisition process, THP provides services throughout the post-acquisition and asset management phases.

The firm concentrates on three areas of consultancy: technical and environmental supervision of real estate transactions and financing, management and monitoring of mid- to large-scale construction projects, and asset management and consulting.

It has built up strong and lasting relations with some of the world’s largest private equity funds, banks, insurance companies, real estate agents, private foundations and consulting companies. It has cemented relationships by offering high standards of professional service, loyalty and confidentiality.

Over the last five years, THP has provided consultancy services in technical evaluation for more than 3,700 commercial properties.

THP has a staff of around 30 employees, drawing on a nationwide network of some 100 architects and engineers. By implementing modern organisational structures and the use of advanced communication tools, it is able to offer clients fair value and first class service.

THP operates across Germany as well as in Europe. It is headquartered in Berlin with offices in Frankfurt, Muenster and Regensburg.

Marc Barber

Marc Barber

Marc was editor of GrowthBusiness from 2006 to 2010. He specialised in writing about entrepreneurs, private equity and venture capital, mid-market M&A, small caps and high-growth businesses.

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