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Ó 1998, Andover Technology Partners
Due Diligence for Investors
Perhaps surprisingly, most acquisitions rely
heavily on information provided by the company that is being acquired, with
third party due diligence by an accounting firm, attorney and possibly a market
analyst. However, none of these outside experts can provide an assessment of
the technology or management’s ability to capitalize on it - which are the only
unique assets a developing technology enterprise has. With every technology
enterprise, there are crucial development concerns, patent issues, technical flaws, or even
substitute technologies in the marketplace that can seriously impact the value of the technology. Do you have the time to
thoroughly look into all of these issues yourself? What would it be worth to
know in advance of an investment that revenues will be lower and slower and
R&D expenditures higher and longer than the CEO expects them to be?
What should a buyer do? Take a closer look
at the business than time seems to permit. Although hiring an accountant to
review the finances and an attorney to handle the agreements is a good idea,
it’s not enough. Our belief is that it’s always better
to get bad news before parting with money. Some important sources
of information include:
The company’s
customers - End users, distributors, OEM’s, etc., as appropriate. Determine
their satisfaction with the product, plans for future purchases, and expected
pricing for future purchases. What other products or technologies would they
consider?
Speak with at least
two potential customers that chose to purchase a competitive
product/technology. What advantages does the other product or company offer?
Are they happy with it and would they recommend it to others?
If there are no
customer’s yet because business is not far enough along, seek out independent
and knowledgeable opinions on the technology and the market.
Speak directly with
the patent attorneys representing the company that is under consideration. If
possible, get independent technical and legal opinions on the usefulness of
patents and applications on file.
Speak with all key
managers: sales, marketing, R&D, manufacturing and engineering. Meet with
each manager individually to get their version of the company’s goals, the
status of the technology and the challenges that need to be overcome in order
to meet those goals. Are they all on the same page? How does management’s
version of reality compare to that of the company outsiders?
The key managers
should have more at stake in the success of the venture than their
compensation. Knowing the background and understanding the motivation of the
management team are critical in making the decision to invest and will help in
working with them in the future. What is the history of the management team,
especially the CEO and key technical people? Are they from the industry? What
is their track record selling technology to these customers?
Throughout this process be on the
lookout for information that tends to come from only one source. Does all
information seem to be coming from, through, or in the presence of the CEO? If
so, chances are that the CEO is filtering the information. And, you're not
getting the independent information that you need to make an informed decision.
This may seem like a lot of work. It is.
But, it's well worth it. That’s why Andover Technology Partners is available to
help. We’ve helped investors avoid what turned out
to be bad deals and have helped make some good ones better.