Due Diligence: Can you afford not to do it?

Wednesday, November 28, 2007
Contributed by: James Wester

All parties need to approach a wind energy agreement with an understanding that it is a potentially long-term, lucrative business transaction. Consequently, you should consider what due diligence is necessary for you to "get to know" your new partner. Because of the size of the potential transaction, the due diligence performed should not be conducted too quickly or too narrowly. Include in your due diligence both a focus on the future and a focus on the past.

Expanding upon the typical due diligence of financial, legal, and environmental due diligence, your due diligence might also include:

  1. strategy;
  2. technology;
  3. operations; and
  4. human resources, including the company's culture.

Strategic Due Diligence

Strategic due diligence considers an acquisition in the context of its industry and asks questions like:

  • Does it make sense - how will it benefit us?
  • How is the company positioned in the industry?
  • Can the company obtain the necessary equipment?
  • What other projects has it completed and/or have in process and/or have in production?
  • Who are others you can contact that have dealt with the company?
  • Who will be buying the electricity? This is a key concern. If there is no ability to sell the electricity generated, there is no financial impetus to build the wind farm.

Strategic due diligence will provide you with the information to drive a decision as to whether that the deal is worth pursuing.

Technology Due Diligence

Technology due diligence considers questions such as: What's the current level of technology? Is it up to date? How well does the company use the existing technology? How much money will the developer need to invest to obtain the equipment and has the developer made arrangement to obtain the equipment?

Operational Due Diligence

Operational due diligence looks at a transaction to determine whether the company can realize the productivity and profitability as anticipated. This may include examining prior projects, available equipment, connectivity, etc. Is the company focused on principles to achieve maximum profitability for everyone's benefit?

Operational due diligence may also identify changes necessary that would lower your risk.

Human Resource Due Diligence

When a project fails, it may be due to people or related human resource issues. We all know that key personnel can leave unexpectedly, which could result in valuable knowledge evaporating overnight. As with most businesses, the success of a project is often dependent upon a good plan and the proper people to implement that plan.

Financial Due Diligence

Financial due diligence analyzes, qualitatively and quantitatively, how an organization has performed financially to get a sense of its financial stability. It's crucial to look at the anticipated performance of a project as represented by the company, look at the underlying assumptions used in preparing the projections to ensure those assumptions are reasonable and based upon objective factors.

In addition, financial due diligence analyzes the assets and liabilities of the company. It is important to learn and understand the liabilities that have been incurred by the developer and/or potential other projects. It is also important to ensure the developer has complied with other tax abatement agreements and/or limitation on appraised value agreements (LAVA).

The Past and the Future

A due diligence investigation will hopefully uncover any serious concerns, inaccurate assumptions or oversights and allow you to determine if any item is actually a deal breaker. Due diligence gives us the opportunity to learn from an avoid past mistakes and better plan for the future.

This column is published for informational purposes only. It should not be construed as legal advice and is not intended to create an attorney client relationship. The views expressed are those of the author and do not necessarily reflect the views of the author's law firm or its individual partners.