When a major U.S. manufacturer of equipment used in homeland security applications set out on an acquisition phase in 2010, 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 of the software company’s financial condition.

The Hillard Heintze Solution

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

This crucial information – on the threshold of negotiations – helped this 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 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 pre-transactional 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.”

The ACTION WEDNESDAY Tool Box: Two Key Take-Aways

  1. Be clear on your objectives: Are you looking for a quick, exploratory “sniff test” of a company or individual at the early stage of your process – and plan on subjecting anyone who makes it to the “short list” much more rigorously later? Or do you need the “deep dive” review right now?   Are you merely seeking to validate information provided by these entities?  Or do you need to widen the net to uncover information not disclosed by the parties?  Are you interested in information of a general nature for an internal team’s purposes?  Or will you be sharing the report with many others who will require more formality, detail and depth in the investigation’s methodology and reporting format.
  2. Make sure you scope the case correctly: Your investigative team will often have several options on the approach and can outline the pros and cons of each for you with respect to issues such as duration, cost, methodology and expectations on the nature of the findings. 

(What’s it like on the front line supporting the firm’s clients?  What are the challenges the firm’s experts help senior business executives, general counsel, board members and other decision-makers address?  Welcome to ACTION WEDNESDAY.  Every Wednesday, the Front Line Blog publishes a new case study.)