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July 12, 2018

Approaching diligence efficiently sets the stage for better integration and the overall process. Judah Karkowsky, SVP Corporate & Business Development at Cengage, has done a lot of roles from buy-side and sell-side. He is going to provide some insights on how to approach due diligence efficiently.

"There's tons that you learn during due diligence that helps you focus on what you're going to do on day one." Judah Karkowsky

Buy-Side Diligence

According to Judah, before they even start doing diligence, they try to understand the business rationale. What's it about, what does the organizational structure look like, how complex would it be to assimilate that, and more importantly, cultural integration and employee retention. 

Really looking at the company as a whole rather than just a piece of technology, product, or a client base. While those things are important, business continuity is a more pressing concern.

They look at the leadership style, company's values, how they are perceived internally and by the market, and their capability for innovation. It needs to be aligned where the acquiring company is at the moment to ensure that what they're bringing in is not just innovative but implementable.

Red Flags to Look Out For

The financial aspect is certainly something that you need to always look out for. Even though the seller has no intentions of being dishonest, mistakes and discrepancies happen all the time. Especially how large organizations share their financials compared to the small companies. 

Another thing that comes up from time to time is ownership issues. Rarely, ownership of the company itself is not clear because the founder passed away, and family members argue about who's running the company. 

But the more frequent issue is functional ownership. Judah and his team will talk to the individual responsible for a particular aspect of the organization, like technology, budget, or HR. They make sure they have identified these key people before they go in. 

Lastly, you also need to pay attention to IP and litigation. Sellers are usually hesitant to disclose being sued, whether it's a former employee or a customer. You need to actively look for that to protect yourself if the complainant eventually comes back.

Integration Planning

Judah starts integration planning as early as they start diligence. He assigns the integration lead from the very beginning and focuses on integration planning no matter what. 

While conventional wisdom dictates you should integrate as fast as possible, Judah doesn't believe so. He believes that aspects of the company that you should hold off integrating, such as the acquired company's technology. Forcing integration might disrupt the engaged and excited employees that will eventually result in a drop in performance. 

Planning for day one is also crucial for employee retention. Worrying about job security is the number one concern of employees in any acquisition. You need to be able to answer their questions before they even ask them. Most importantly, Judah makes sure that everyone feels like a part of the team. 

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