It didn’t happen yesterday, or even a couple of years ago, but my memory of it couldn’t be clearer. With my brother, Rich, beside me as best man, we stood in the front of the little Maine church on Bailey Island watching the matron of honor walk down the aisle. Then the organist began the Trumpet Voluntary, the guests rose as one and Annie, my bride, appeared at the entrance to the church, radiant on the arm of her father.
They had proceeded perhaps eight or ten steps down the aisle toward us when, totally without warning, the music stopped. I looked over to see if the organist had had a heart attack. She said later that it looked like I was going to have one. Annie, recognizing bad karma instantly, headed back for the exit.
But Rich saved the day. Eyeballing the power cord, he traced it along the floor to the wall socket and – showing a flash of the mechanical brilliance that earned his grandfather an MIT degree at age 19 – plugged it back in. The organ was back in business, the trumpets were volunteering again, and Annie decided that – what the heck – it was worth trying again. All in the space of about 15 seconds.
I whispered to my brother words to the effect of “I’m glad I brought you along.”
* * * * *
The music stopped for one of my clients last month, and as it turned out, the power cord wasn’t just unplugged, it was severed.
After a full day in their lawyer’s office signing away the company that the four partners, my clients, had built over the course of three or four decades, all of the paperwork was done. The buyer was to close out the deal the next day with a reciprocal signing followed by a wire transfer to fund the all-cash agreement. Though I hadn’t been part of the negotiations or structuring, I was pleased that my long relationship with the group would end so positively…
…until the next afternoon, when I received the email message: “…our deal just blew up. After they [the buyers] received the distribution schedule this AM they told us that they did not understand that the balance sheet would have a [line of credit] balance on it at closing. We reviewed this with them last week, early in Feb, and early in Jan. Their lawyers told [our attorney] that they ‘did not understand the deal.'”
“Maybe they were just trying to give us another haircut on the price.”
* * * * *
Totally coincidentally – and perhaps ironically – the very next day I sat in an attorney’s conference room with another client, involved in another buy/sell deal, unrelated to the first. This meeting brought together just “the bean-counters,” two from the Buyers and two plus me representing the Sellers.
The objectives of the meeting were distributed to both parties:
- To understand [the Seller’s] financial accounting policies plus closing and reporting processes;
- To understand [the Seller’s] chart of accounts and internal controls;
- To establish cut-off procedures at closing while ensuring accuracy of working capital together with an accounting integration plan.
Based on the experience of my other client, closing the cracks – before anything could fall through – was critical. Fortunately (but not accidentally) our accounting had been meticulous. As we passed across the table each requested document, most of them produced right from the accounting system, the Buyer’s representatives became more and more confident that they were seeing what they were actually going to get (see shopping list in sidebar). Communication among us developed collaboratively. The discussion became less historical and procedural and much more anticipatory: what will the financial statements look like after the deal is closed? How will we integrate the two systems of accounting and administration?
This deal closed two days ago. The two partners of my now-former client company enjoy the kind of personal financial freedom that can only be described as truly liberating. Based on their successful close in the context of my other clients’ disappointment, there are three critical elements in the financial area (among a number of others overall) which stand out as success factors:
- Hands-on, joint involvement by the accounting and financial managers on both sides established a level of mutual rapport, trust, and respect that helped to neutralize the suspicion that inevitably surrounds high-stakes negotiations.
- Our face-to-face, unfiltered conversations resulted in a continual confirmation of the basic deal elements – and their financial implications – as we moved down the audit agenda.
- Two people on one side and three on the other, all with the same accounting and financial predisposition, became an internal resource to the negotiating teams.
In the event, with the finance teams keeping the organ plugged in and the music playing, and the lawyers continually smoothing the carpet, my clients and their successors not only made it to the altar successfully, but still (two days later) have no regrets.
Thirty-one years later, the same (and then some!) can be said about Annie and me.
“Due diligence” failures are not limited to business deals. In mid-February 2006, the editorial board of the Dallas Morning News published the following:
“Seems as though Democratic candidate Tom Malin’s background as a prostitute is all the talk since this morning’s [ Dallas Morning News ] news story revealing his past.
“Unfortunately, we on the editorial board became a piece of this story since we recommended Mr. Malin over his opponent in the legislative primary earlier this month. As noted in this morning’s news story, this new information about Mr. Malin has prompted us to reconsider our recommendation. We’ll note on the editorial page tomorrow, in fact, that we are rescinding our recommendation of Mr. Malin altogether.
“…it’s embarrassing to have to rescind a recommendation. We didn’t know about his past when we interviewed him and there was no record of it in his questionnaire or the other background checks we did on him. Had we known we probably wouldn’t have recommended him. We know now and so we’re telling readers as forthrightly as possible that we’re withdrawing our recommendation of him.
“…Let me note here that we won’t be recommending Mr. Malin’s opponent, either… this primary doesn’t exactly offer voters in this district much to get excited over.”
– by Keven Ann Willey, writing in Dallas Morning Views February 17, 2006
Draining the Swamp
In anticipation of closing the deal (see main article) the accounting due diligence included the following:
- Review of general ledger transactions for previous 14 months
- Current trial balance; reconciled balance sheet; income statement
- Bank account reconciliations; statements for last three months
- Detail of cash disbursements, past 14 months
- Accounts payable detail and purchases by vendor, past three months
- Revenue recognition policies
- List of credit and discount terms by customer
- Accounts receivable aging detail, last three months
- Sales by customer, past 14 months
- Fixed asset register, showing cost, depreciation, life and net book value
- Inventory by part number, including unit cost, quantity, and aging
- Disclosure of all compensation “arrangements”