Buyers, Check Backgrounds
August 1, 1999
"Acquisitions Wanted: Growth-oriented waste management firm seeks interested seller with trucks and customers. Very few questions asked."
Sad to say, some people worry more about the background and compatibility of a would-be social companion than a prospective business partner.
Smart and successful firms, inside and outside the waste management field, can save valuable time and expensive professional fees, and avoid considerable aggravation by using relatively straightforward investigative techniques early in a business courtship. Too often, a prospective buyer hires accountants, lawyers and investigation firms for so-called "due diligence" work after the parties have signed a letter of intent.
Much information, however, can be uncovered and studied without the other party even knowing. Public records, government sources, industry publications and commercial credit reports can yield useful information about a prospective partner or seller.
Compiling background information in a typical merger, joint venture or acquisition is a continuing process. If a company is interested in making a deal, it should begin with a pre-contact investigation, relying, for the most part, on publicly available information.
For example, a waste company that was considering a business partnership hired investigators to get information on a potential partner (PP). They discovered several of the company's affiliates had been involved in lawsuits. Certain documents filed at the local court- house, particularly a transcript of a deposition of PP's owner, revealed much about PP's strategies and business philosophy, and gave the acquiring company a bargaining advantage.
Once negotiations begin, the buyer's research should continue, building on the public information by interviewing people with pertinent information.
During one such negotiation, a seller announced that one of the buyer's competitors also had made him an offer. With a few well-placed phone calls, the buyer learned that a competitor indeed had offered to buy the company - nine months earlier - but couldn't complete the deal because it was spread too thin financially to produce the necessary cash. In fact, the competitor, which had since become financially worse off, was not a realistic threat.
The final step occurs after the parties sign a letter of intent or memorandum of understanding, committing themselves to negotiations in good faith and full disclosure. With unrestricted access to the other side's records, the buyer can review the seller's accounting methods and business practices. Liabilities and potential claims that are uncovered can be addressed in the give-and-take.
Timely and thorough background checking can reduce expense, time and risk in transactions. By developing a business history of a candidate firm - how it has fashioned and implemented previous deals, how often it has resorted to litigation or has been hauled into court, how legitimate and trustworthy its principals are - an acquiring company can base its strategic business decisions on objective information and can improve its negotiating position.
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