Getting a transaction under letter of intent by reaching a reasonable offer may seem like the most difficult part of the selling process, yet sellers beware, the negotiation is generally not over. Once an offer has been accepted, the due diligence process begins.
As a seller, it is rare to see any further price increases resulting from the due diligence phase. It is much more common that buyers discover things that have been neglected or that they don’t care for and that they use those items to justify a lower purchase price when all is said and done. Thus, it is crucial that sellers are prepared to enter the due diligence process, and it is recommended that sellers work with an advisor to ensure due diligence goes as smoothly as possible. Being unprepared or bringing a DIY approach to due diligence is a sure-fire way to invoke Murphy’s law, and have the transaction potentially crumble after many hours of painstaking work. A trusted M&A Advisor should be able to add value through coordination, preparation, and negotiation during the due diligence process to help sellers maximize the value they receive for their business.
Both the seller and the buyer have invested time, capital, and energy in order to get the transaction to the current stage in the process. Building an understanding of how to go about the due diligence phase is crucial in order to see the deal through to the closing table.
What is Due Diligence?
Due diligence is a thorough review of every aspect of a seller’s business, including but not limited to financial statements, business records, contractual agreements, real estate specifics, customer and vendor arrangements, business strategy, proprietary information, operations, and more. Generally, there are multiple rounds of requests, questions, clarifications, and conference calls or meetings to discuss and help the buyer understand intricate or confusing parts of a seller’s business.
If there are any weaknesses, hidden problems or items of potential concern to a buyer, it is very likely that a buyer would uncover them during this process and hence it is crucial to be prepared to answer difficult questions prior to sharing confidential information.
How to best survive Due Diligence?
Two essentials for not only surviving due diligence but also receiving the most favorable terms at the close involve thorough preparation and a commitment to fully disclosing all information. Buyers would rather be notified upfront of potential deal-breakers and will trust you as a seller if you are honest about any potential issues. While disclosing information that a buyer might view negatively, it is best practice to impart knowledge as early as possible as that allows a buyer to accept and move past any potential issues. This also helps as it’s much better for a seller to notify a buyer rather than have the buyer uncover it on their own. Communication and trust throughout this end of the process are essential to getting the deal across the finish line. Hiding problems is always a mistake as buyers may wonder what else is not being disclosed when they uncover other issues that they should’ve been notified of. Transparent communication and quickness to answer questions and provide documents both aid in an efficient and orderly due diligence review.
As a seller committed to fully disclosing all information, it is essential that the information be easily accessible, understandable and explainable. An advisor can help a seller aggregate all of the standard requested materials in a data room prior to the beginning of the due diligence process. Doing so gives both the seller and advisor a chance to craft a story or proper explanation for any issues likely to arise. If issues arise and are discussed, proposed solutions should be integrated into the finalized letter of intent and purchase agreements. Keeping track of negotiations and discussions on paper is pivotal to ensuring both sides are on the same page and prevents rehashing of terms agreed upon with a handshake.
If a deal falls apart during due diligence, the seller is much better off by being properly prepared. They will be able to pivot and quickly reengage with other interested buyers and keep the process moving along.
Almost any issue or concern brought up throughout the due diligence process can be handled by your advisors given it is disclosed upfront and presented alongside a story and solutions to mitigate or manage the issue.
Have more questions about due diligence or want to know what your business is worth for free? Contact [email protected] and our experienced professionals would be happy to answer any questions or conduct a business valuation.