May 14, 2019

Don’t miss what’s lurking in your blind spot

By Nancy Appelquist, Director of Operations

Having survived the learning-to-drive phase with two teenagers, you better believe I emphasized with both my son and daughter the importance of always checking your blind spot. Not relying solely on the handy mirrors that show you what’s behind or coming up beside you, but that one spot you can only see by looking with your own eyes—the spot where you often find a vehicle cruising along in that hidden pocket over your shoulder. 

It got me thinking about something we often find with companies going through transitions—they get blindsided by problems they didn’t notice were there. And it’s shocking to them, because they did their due diligence and everything seemed on track right out of the gate, but then problems emerged months or even years later—problems that could have been avoided or proactively addressed if they had checked that proverbial blind spot.

What’s most frustrating in these situations is that the issues were there all along, flying just under the radar and going unnoticed because nobody was looking in the right places or asking the right questions. Maybe it was overconfidence. Maybe it was too many other distractions. Or maybe it was because there wasn’t an ag point of view at the table at the right time.

Due diligence in merger and acquisition situations entails careful and deliberate examination of a commercial opportunity to evaluate potential. The dream team of lawyers, investors, and accountants is assembled, and each meticulously follows its own due diligence protocol. But what’s so frequently overlooked is the ag market perspective, or the involvement of some entity who can evaluate the numbers from an ag point of view…someone who can work in tandem with other disciplines to help assess the story around the numbers.

The Right Eyes Looking at the Right Metrics

We'd like to propose a new kind of due diligence—one that can assess the change from an ag vantage point—a different perspective than what investors, attorneys and accountants bring to the table. Those three disciplines are necessary and valuable, but it’s the combination with ag experience that makes the magic happen.

Companies get caught up and overconfident when the numbers look good on paper, but we all know there's always more to the story. Having someone evaluate that story from an ag perspective can help anticipate and uncover potential problems before it's too late.

“If we’d only known”

When problems are discovered, it doesn’t mean the deal is not a good one or that it’s a mistake … but you’ve got to look for the spoilers that could lead to failure down the road.

We find this situation pop up frequently with clients going through transitions—and sadly, we’re often involved too late in the game to stop a disaster before it rears its ugly head. What you see on the spreadsheet or from sitting behind a desk is far different than what you see through an ag industry lens—using industry knowledge (and the gut feel that comes from having a deep understanding of the complexities of the industry) and talking to people is so much more powerful.

The problems we most frequently see have to do with personnel issues, having a sales organization that’s not set up for success, clashing cultures, and underestimations of the competition. Here are a few specific scenarios we’ve uncovered over the years that due diligence failed to uncover:

Poor understanding of the product: One company thought their deal was a slam dunk until they realized too late that the fungicide they were acquiring had a very limited window for application. Because it only has a competitive advantage when used in the last few days before picking, it can’t perform in the market like other fungicides because it only captures a very limited market of last-minute applications. Had the client talked to customers ahead of time who are using the product (rather than make assumptions about the product’s use), this failure could have been avoided.

Pricing yourself out of the market: Some companies are inclined to grab attention for their new entity by setting their product prices dramatically lower than the competition - and in the right market that is an effective way to grab market share right out of the gate. But if the prices are set too low, the company may capture market share and show good growth in gross sales, but  at the expense of profitability. It’s just not a sustainable business model.

Products that aren’t scalable: We love when we’re able to help clients avoid disasters, as in the time one client was in the middle of a fertilizer company acquisition. From the high-level financial and legal perspectives, the deal looked like a no-brainer. But our resident agronomy guru Mike Karst suggested the fertilizer product was too specialized to a single sector and wouldn’t be scalable. The company saw the investment required to scale up and decided it was “no deal” – averting a probable crisis.

Don’t Gloss Over the Reality Check

The moral of all these stories? Invite the ag expert to the table. They bring the reality check to the process. Due diligence covers important details, but it’s not a reality check. And reality is what will break you.

We’ve helped clients through transitions many times and find our perspective particularly useful with smaller companies that don’t have the staff or resources to spend the time on this kind of preventative investigation.

Great due diligence that uncovers hidden issues is invaluable to our clients – even when it causes a deal to fall apart.  It’s a far better position to avert a bad deal than be forced to clean up a mess after the fact. You’d rather steer the ship in the right direction from the start than have to turn it around 180 degrees when you’re well out to sea.

If you are preparing for a transition and want to bring a reality check into your due diligence, contact Nancy Appelquist at 845.544.1985 or nappelquist@entira.net.