In the automotive dealership space I have seen acquisitions turn into legal tribulations when after a deal is closed personnel related non-compliance issues pop-up creating huge, multi-million dollar headaches literally days after deal close.

What was found was a fundamental disregard for the human element in the valuation of a business...what have the people been up to that reinforces the business processes that helped make the business successful as well as what they have been doing on their own when no one is looking...

The due diligence process should disclose and uncover items that have a material impact on the valuation of the business. The experience above suggests that uncovering personnel related
liabilities should run hand in glove with the business' valuation
process…But how
does an acquiring company evaluate the causes of liabilities that can
adversely affect the acquired business? How indeed…

In the auto dealership space, traditional due diligence is about reviewing the books, assessing the local market attributes, following IRS
Revenue Ruling 59-60, using the “comps” in the local market as
well as reviewing the fun and unique OEM franchise requirements of a
dealership where factory site control, image compliance or
exclusivity can have material impacts in property valuation,
financing flexibility, and exit...

In ADDITION, you are also buying the processes and people who make up the culture, good or bad, that helped that
dealership make money over the years. How do you gauge the type and
extent and importance of internal processes that build value for the
dealership in question?

Comprehensive due diligence is about knowing the culture you are buying. Is the business a stickler for compliance details? Are the people and processes in place designed
to protect your investment from hungry lawyers and misguided
investigators?

If your valuation consultant did the right things and you find something “not quite right,” it is
obvious the risks are higher than those assessed when you could smell
the new revenue stream based off the “Rules of Thumb” your
consultant relied upon to get you here.

So visibility into personnel related compliance issues provides you the opportunity to offer a lower price that reflects not only the generally accurate valuation “Rules of Thumb” but also those personnel based policies and procedures that can land
you in a closed room with lawyers mumbling secret somethings in their
client’s ears.

Ultimately, those personnel-related risks you uncover will impact not only what is paid for a business, but how well you can expect the business to perform after the acquisition. After all is said and done, compliance with regulations and mandates, compliance with strategic partners requirements and compliance with those proprietary business processes unique to your organization all combine to support and expand your competitive advantage, which is the harbinger of valuation.




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