RSM Poland


Transaction adviser as the Guardian Angel of each investor

statutory auditor, Audit Partner at RSM Poland

A few weeks ago I participated in a conference on the development of the private investors market (Business Angels) in Poland, and what I heard from one of the Angels surprised me a little. Sharing his experiences in making investment decisions, the Business Angel said he did not use the services of consulting firms at all or did it in a very limited extent, and performed his own analysis based on publicly available data and the business plans of the target company. Indeed, such an approach is possible, but only in a situation where a company in which we invest is in the process of starting its business (a startup), there is no history, and we invest in the idea. What if the goal of our investment has its own history, it has been in business for some time, and its balance sheet presents important components of fixed assets, working capital, accumulated profits? In my opinion, in any case other than the above-mentioned analysis of a startup, an approach based on own analysis of the investment can be very risky for the investor.

What should be checked?

Due diligence − in a nutshell − is an extensive survey of the company. Due diligence is usually carried out prior to the acquisition of a company or planned investment, and its objective is to identify opportunities and risks associated with making an investment decision. Due diligence is used to examine companies in terms of their financial, accounting, tax, legal, technical, and even commercial condition. Thus, the spectrum of information about the unit can be very broad.

Not everyone has fair play in their blood

It is not my purpose to enumerate the financial benefits of the due diligence process during negotiations, because this was discussed in the article "Due diligence − a service worth millions", but I want to point out the risk that is associated with too much confidence in yourself and your infallibility.

One of the companies which I had the pleasure to work with three years ago decided to purchase a company providing competitive services. Due to the fact that the acquired company operated in the industry which my clients knew very well, they decided not to use the services of advisory companies in the proposed transaction and that due diligence would not bring anything new. The company's management board assumed that no one knew more about the industry, competition and risks than they did. Another factor that spoke for the purchase transaction without a prior in-depth analysis of the target was the fact that one of the board members of the purchaser was an athlete, so a person who must have "fair play in his blood."

I learned about the transaction at the end of the year, when I first started a preliminary survey at the client. And the hard part begins here. After a few days it turned out that the financial statement of the acquired company at the acquisition date lacked provisions for litigation which the company was a party to, no provisions had been made for the basic costs of labour, and even the very method of booking long-term contracts aroused considerable controversy. As a result of adjustments, instead of profit the financial statement disclosed a big loss. Unfortunately, it was too late to renegotiate the purchase price, and in the end the company greatly overpaid.

Transaction advisory services still needed

After the fact, the board members of the investor spent a lot of time analysing the transaction, wondering at which stage they had made mistakes. After several hours of discussion, they came to the conclusion that in the case of acquisitions, transaction advisory services were necessary and in the future, before making an investment decision, they would certainly ask specialists to perform legal, tax and accounting due diligence.

In confirmation of this thesis I will refer to the recent financial and tax due diligence in an acquired entity performed on behalf of our client − the acquired entity with alleged equity of PLN 8 million had to accept the adjustments made by the auditor and change this amount to - (minus) PLN 7 million; the difference in value and scale are significant, aren't they? Not to mention the results of the tax part of the due diligence, "dead bodies in the closet" and necessary CIT adjustments 5 years back... In this case, the investor did not rely on its extensive experience in the market of mergers and acquisitions. Having both feet on the ground and professing the principle that "pride goes before a fall," he used the services of specialists and saved not only millions of zlotys, but also his nerves and health.