Monday, June 27, 2011

AMA Handbook of Due Diligence

I harvested a huge bag of lettuce (Hobby 1) on the weekend to freeze to make soup and you can see, I still have lots left. Lettuce put through the blender makes an excellent soup (hobby 2)stock.

Also had a great 8 mile run(hobby 3) yesterday in the heat. I feel sometimes I have to put in comments in my blog about my hobbies so my mom who thinks all I do is work knows that I mostly just relax.

Some VCs take the approach that you need to invest in a lot of companies to find a winner. They do limited due diligence on the theory that it does not help them find winner companies. I disagree with this approach and think good due diligence improves the odds.

I, personally, love thorough due diligence but lack the attention required to do it well myself so I like to surround myself with people who do it well. This is one of the reasons I joined Golden Seeds who are awesome at it.

Recently, I read a great book by William Crilly and Andrew Sherman called, The AMA Handbook of Due Diligence. I have been involved in a number of transactions, both on the buy and sell side, and I like this book because it takes a very complicated and involved process and explains it in a way that is thorough, clear, and best of all, concise. This book focuses its attention on potential buyers, and can act as either a road map for the inexperienced acquirer, or a point of reinforcement for those who have experience in acquisition due diligence.

The process of performing due diligence on a targeted acquisition has two main parts, as I see them:

1. Analysis of the company itself. It is important to understand a company’s financial statements (and whether they are truly representative), its current health, growth strategy, planned product expansion/improvements, and all other facets that are specific to the company.

2. Analysis of the industry in which the company operates. The book lays out very clearly the information that is necessary to understand where a specific company fits with regards to market share, barriers to growth, etc.

In order to effectively evaluate a company and its place in the industry, Crilly and Sherman note you must know:

· Where to look

· What to ask

· What tools to use

· Who to ask

· How to test premises/answers

· Who should ask

The process, the book explains, is just as much an art as it is a science. The “art” aspect of due diligence is the style and experience to know which questions to ask and how and when to ask them. The “science” comes in the form of preparation of comprehensive and customized checklists.

There is a section at the end of the book that includes these comprehensive checklists. They are very detailed and offer a great starting point for investigation of a potential transaction. From my experience I have a good general idea of what I am looking for in a company both in terms of profitability and competitive advantage, but also with regard to risk. However, these checklists provide an excellent foundation and, if utilized, can highlight the opportunity or red flags in a potential transaction.

Overall, a great, informative read, and will be a valuable resource for me in the future.


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