Chapter 5: Due Diligence Summary
“A detailed, rational approach to achieving an understanding of an organization’s operations”.
Verify financial assets of an organization
Fully understand current or potential liabilities
Document the levels, capacitates, and compensation of staff.
Assess the condition of physical facilities
Identify any legal barriers or challenges to moving forward with a merger, consolidation, or other type of strategic alliance
An “extension” of the side-by-side analysis.
Due diligence involves sharing confidential information, so it usually does not occur until after the partnering organizations have reached an agreement.
Attorneys, CFO’s, HR directors, and other technical experts typically conduct due diligence review.
Some task force members felt that a side-by-side analysis is enough, however due diligence is necessary because board members have fiduciary responsibility for the organizations and fulfilling that responsibility requires sound judgment in establishing policy and making decisions.
Two ways to approach due diligence
1. Form a due diligence review team drawing upon expertise available from both organizations.
Consists of attorneys, financial management professionals, and other experts who can interpret organizational documents.
Assemble the required expertise by engaging staff, board members, external advisors, as well as other experts on a pro bono basis.
This team would be responsible for conducting a thorough analysis of due diligence items, identifying any conflicts or obstacles that might impact moving forward with the merger, and determining if and how such issues could be resolved. Present their findings to each organization’s board.
2. Employ legal and financial consultants who specialized in nonprofit mergers to conduct the due diligence review on behalf of the organizations. Much more thorough and objective approach. But also expensive.
The review team’s checklist included the following:
Financial Statements and Related Materials
Properties and Leases
Patents and Proprietary Info
Contracts and Agreements
After the side-by-side analysis, it was found that Helping Hand was in the process of negotiating a potential Medicaid reimbursement liability. Since most of Helping Hand’s revenue came from Medicaid reimbursement, they failed to adequately document the $500,000 worth of services rendered over the previous 5 years. If Helping Hand could not provide appropriate supporting documentation for these billed services, the state would ask for all the money back. If the organizations merged, then Waybright would assume responsibility in this as well. Some felt Helping Hand kept this information on purpose, so the trust that had been established was threatened.
A formal due diligence process was initiated after this, and Helping Hand was aware of the additional documentation it