Does anyone do background checks for M&A deals?

April 2011

"I was recently put in charge of a fairly major acquisition my company made. I know our M&A team did a lot of due diligence with the company financials and technology, but apparently they never ran even a basic background check on the three founders. It turns out the founders are a rather shady bunch, with a history of tax evasion, mortgage foreclosures, and lawsuits. These guys are gone now, but I'm curious about why our M&A team never checked them out. Isn't this standard practice?"

Mike: Background checks should be part of the due diligence process, but--as you've discovered--the job doesn't always get done properly. If the seller is going to make a graceful exit as soon as the deal is done, sleazy behavior is probably not a big deal. But even then, there's a risk you'll inherit any problems the seller had with unpaid taxes or pending litigation. You never want to be caught by surprise.

Moreover, running a background check on individuals is so easy and inexpensive on the Web that there's no excuse for skipping this part of the due diligence process. There are several online services that will check public databases for criminal and financial red flags, and an open-ended Google search will usually turn up any important background.

How do I show the asset value of a user group?

May 2010

"We have an active user group community that lowers our tech support costs and indirectly generates sales. I think of this community as one of our most valuable assets and I'd like to quantify that value to a potential buyer. The only hitch is that we don't actually own the user group. Suggestions?"

Mike: From a buyer's perspective, the value of an asset lies in its ability to generate revenues and profits. You don't "own" your sales reps, for example, but a high-performing sales organization certainly adds to the price you'll get when you sell your company. Similarly, the value of your user community will be reflected in your sales revenues, lower support costs, higher renewal rates, and even product quality (if your users are suggesting desirable enhancement ideas).

Of course, buyers also take into account any risk factors that might reduce your future revenues. Often, an acquired company loses its original identity, and the user community becomes less enthusiastic or even disbands. If that's part of the buyer's strategy, you can expect the value of your user community to be seriously discounted.