Avoid Disastrous Mistakes in Due Diligence

2007-8-2 21:45 From: RECharger Magazine

In the months since my article "Building a Business Plan" (Recharger Magazine, November 2006), I've had numerous phone calls and e-mails from entrepreneurs who had either started a business or were planning to do so. Comments ranged widely, but the common thread was that both planning and due diligence - the pre-investment evaluation of the business opportunity - were generally poorly executed and insufficient.

The input that I received reminded me of a situation from my prior career in the software industry. It is an outstanding example of how not to perform due diligence.

Our company looked to acquire another software company. Management put a team in place to perform the needed due diligence. Unfortunately, the first mistake they made was to put one of the greatest proponents of the acquisition in charge. The report back to management was, naturally, strongly in favor of moving forward. However, if you spoke to most of the individuals who actually did a lot of the work - speaking with customers, testing the product that we were buying, and much more - you would have wondered how the report could have possibly been a positive one. Naturally, the acquisition went through, the sellers made millions, and we acquired a company and products that cost us a huge amount of money and time with no return on investment.