Due Diligence: Planning, Questions, Issues

220 Pages·2007·0.65 MB·English

by  Gordon Bing

Due Diligence

DUE DILIGENCE
Planning, Questions, Issues
Gordon Bing
LibraryofCongressCataloging-in-PublicationData
Bing,Gordon.
Duediligence:planning,questions,issues/GordonBing.
p.cm.
Updates:Duediligencetechniquesandanalysis.1996.
Includesbibliographicalreferencesandindex.
ISBN978–0–313–34540–1(alk.paper)
1. Businessenterprises—Purchasing—Handbooks,manuals,etc.2. Saleofbusiness
enterprises—Handbooks,manuals,etc.3. Investmentanalysis—Handbooks,manuals,etc.
4. Disclosureofinformation—Handbooks,manuals,etc. I.Bing,Gordon.Duediligence
techniquesandanalysis.II.Title.
HD1393.25.B562008
658.1’62—dc22 2007038550
BritishLibraryCataloguinginPublicationDataisavailable.
Copyright©2008byGordonBing
Allrightsreserved.Noportionofthisbookmaybe
reproduced,byanyprocessortechnique,withoutthe
expresswrittenconsentofthepublisher.
LibraryofCongressCatalogCardNumber:2007038550
Firstpublishedin2008
PraegerPublishers,88PostRoadWest,Westport,CT06881
AnimprintofGreenwoodPublishingGroup,Inc.
www.praeger.com
PrintedintheUnitedStatesofAmerica
Thepaperusedinthisbookcomplieswiththe
PermanentPaperStandardissuedbytheNational
InformationStandardsOrganization(Z39.48–1984).
10987654321
Contents
Preface xiii
1.GettingStarted:BasicInformation 1
2.PreliminaryCriticalInformation 7
3.KeyEarlyIssuesandAlarms 11
4.OwnershipandCapitalStructure 17
5.DirectorsandGovernance 21
6.Management 25
7.ProductsandServices 31
8.R&DandTechnology 35
9.MarketsandCustomers 39
10.Competition 43
11.Marketing,Selling,andDistribution 47
12.Pricing 51
13.Advertising 55
14.PublicandInvestorRelations 57
15.Manufacturing 61
vi Contents
16.PurchasingandOutsourcing 67
17.HumanResourcesandEmployees 71
18.UnionIssues 77
19.EmployeeCompensationandBenefits 81
20.RetirementPlans,401(k)s,andESOPs 85
21.CultureoftheBusiness 89
22.LegalandRegulatoryIssues 93
23.GovernmentBusiness,Lobbying,andPolitics 99
24.InformationSystems 105
25.Internet 109
26.Budgets 111
27.Planning 113
28.InsuranceandBonding 115
29.EnvironmentandSafetyIssues 119
30.Debt,Banks,andFinancialInstitutions 123
31.Investments,Hedging,andDerivatives 127
32.CashandCashManagement 131
33.Accounting:GeneralQuestions 135
34.AccountingPolicies 139
35.AccountsandNotesReceivable 143
36.Taxes 147
37.Inventory 151
38.FixedandOtherAssets 155
39.Liabilities 159
40.CostofSalesandGrossProfit 163
41.SellingandGeneralandAdministrativeExpenses(SG&A) 165
42.IncomeRecognitionandBacklog 167
43.IntracompanyTransactions 171
Contents vii
44.RealEstate 175
45.InvestmentQuestionsandIssues 179
46.Off–BalanceSheetItems 183
47.AssetsandLiabilitiesExcluded 187
48.FinancialRatiosandTrends 191
49.WarningSigns 195
50.OutrageousImproprieties 197
Index 199

Preface
This is a book for those seeking to study an entire business or seg-
ments of a business. It describes a systematic approach, techniques,
the questions to ask,the documents to review, and issues to explore.
Theinvestigativeprocessconsistsofthreegeneralcategoriesofactiv-
ity: information gathering, evaluation including quantification, and
conclusionsleadingtodecisions.Documentreviewandquestionsare
thefirststepsintheprocess.Thevalidityofthedecisionsisinfluenced
byboththequestionsaskedandifallpertinentquestionswereasked.
Knowing what questions to ask, and which documents to review, is
the foundation of the due diligence process. After all information is
obtained, and the positive and negative aspects of the business are
quantified,intelligentconclusionsanddecisionsarepossible.
Theprimaryandusualpurposeofduediligenceistoverifythatthe
businessisintheconditiontheinvestorbelieveditwas inwhilecon-
sideringorreachingapreliminaryagreement.Thisconfirmationactiv-
ity includes a search for undisclosed liabilities and problems and an
overall understanding of the business. An investor may have other
secondaryobjectives,suchas:discoveringundervaluedassets,identi-
fying high-potential employees, finding synergistic opportunities,
obtaininginformationtoplanatransitionofownership,andinforma-
tionfornewmanagementto‘‘hitthegroundrunning.’’Alloftheseare
valuableobjectives,buttheprimarypurposewillremainconfirmation
of the assumed condition of the business and a search for negative
conditions.