Client’s Challenge: An M&A Target Stumbles on Payroll – and Hints at Financial Challenges
When a major U.S. manufacturer of equipment used in homeland security applications set out on an acquisition phase, it focused early and quickly on a privately held software company with an attractive portfolio of patent-protected technologies and products.
On the eve of preliminary negotiations with the software company’s management team, the manufacturer discovered that the entity was having difficulty meeting payroll obligations – and asked Hillard Heintze to conduct a quick strategic due diligence investigation and forensic accounting of the software company’s financial condition.
Our Solution: Hillard Heintze Conducts a Financial Health Check
Given the very short window of time, Hillard Heintze bypassed the normal protocols associated with a full pro-forma review of each of the company’s principals and focused instead on various indicators of financial health, such as the business’s state and county tax obligations. The strategy paid off almost immediately.
On the morning that the manufacturer’s acquisition team opened its M&A “war room,” Hillard Heintze presented the investigative findings to its CEO and general counsel. In short, the software company (1) was in arrears on county taxes for the prior reporting periods; (2) had mortgaged its headquarters to a key vendor; (3) had a second mortgage written down recently by nearly 60%; and (4) had had the accounts receivables from its largest customer recently assigned to a creditor (and competitor) to satisfy a civil judgment.
Impact on the Client: Vital Information Delivered Just as Negotiations Began
This crucial information – on the threshold of negotiations – helped this manufacturing company’s M&A team establish a valuation for the target company, normalize its financial statements and begin negotiations from a clear position of strength.
Unplugged: The Project Manager's Post-Engagement Perspective
“Had this been a straight due diligence exercise focused on the executives and the company, we would likely not have captured some of this key information – like the corporate mortgage to the vendor and the overdue county taxes. And it would have been a lot more expensive for the client.
I see this as a good illustration of the subtle, but very meaningful differences between a pretransactional due diligence mission and a business intelligence mandate.
And, because this client gave us some critical intelligence – and the freedom to ‘follow our nose’ – we were able to deliver solid value, very quickly, at a far lower cost than a full pro-forma would have required.”