The Guide to Due Diligence
If you’ve been reading this blog for a while, you know I draw countless parallels between selling a business and the journey from dating to marriage. In fact, I dedicated an entire article to describing negotiations entirely as a dance. There’s no other way to say it. There are a lot of similarities.
Which brings me to breaking down the due diligence. Again we’ll catalogue the process as a couple working their way to walking the aisle and saying, “I do.”
We’re skipping the first few parts of dating and diving right into when both parties agree to go exclusive, which means a signed MOU or LOI. The reason I call it “exclusive” is that when you sign this agreement it typically means that you will take the business off the market. If you’re curious how the business parties get to this point, check out the blog, Understanding the Role of MOUs, LOIs and Term Sheets.
During the due diligence period, it’s time to learn about the business—the good, the bad, and the baggage. Getting to know each other takes time. Same as how you can’t sit down on your second date and tell your date about every bad habit you have, you can’t throw everything at a prospective buyer at once. You have to slowly roll out information.
The other reason to slowly roll out information is that you are still vetting the buyer. You can’t risk giving all your trade secrets or fully pulling back the curtain in round one in case the buyer isn’t serious and just wants to see your operations.
Take this topic deeper with Considerations When Selling to a Competitor.
Part of going exclusive includes an in-depth screening of the potential buyers. Our team at Exit Consulting Group (ECG) does an in-depth review of potential buyers to ensure clients don’t give away trade secrets to companies fishing for information. All prospects considered for exclusivity must be serious buyers.
Prepping for Marriage
If going exclusive hasn’t scared one of the parties off yet, it’s time for the in-depth screening. Here the buyer will bring in experts to comb through the business. From verifying the financials to examining the organization charts, the buyer is on a mission to validate the seller’s assumptions on the business. They also need to know about any skeletons in the closet.
Here are some of the actions they will perform:
- Examine financials, tax returns, and bank statements;
- Review organizational charts and employee evaluations;
- Screen sales reports and verify that taxes have been paid;
- See if credit cards have been reconciled;
- Evaluate equipment;
- Review customer concentration;
Some corporations will even hire forensic accountants and professional business consultants. Their goal is to find small faults or other red flags to discount the sale price.
Sellers will need to see commitment from the buyer before cracking open the books and giving full reign to prospective buyers. For example, buyers won’t be able to talk to employees or interview vendors until after the sale is final, unless otherwise negotiated. One of the reasons is that the owner will need to systematically inform key employees about the transition. We go into that process in depth here.
Additionally, during this phase buyers will need to begin proving financially that they can purchase the business.
When it comes to planning the wedding, there are always blow-ups. Someone’s mother doesn’t appreciate the beer selection or the cousin twice removed might be bringing the groom’s ex to the ceremony. At various points, the couple wonders if the wedding is worth all the trouble. In fact, movies often depict couples breaking up multiple times throughout the process, continually riding a cycle of “the wedding is off,” then “the wedding is back on,” process.
The final phases of a business sale mimics the on-again-off-again wedding cycle. In fact, we coach our clients that if we don’t walk away from the table multiple times, or in essence “call off the wedding,” we’re not fighting hard enough for the client. It’s how the game is played.
Despite the signed MOU or LOI sometimes the goal for a buyer is to get the seller to adjust the price or turn the terms in their favor based upon what they discovered. One of the reasons our team at ECG does so much work before putting the business on the market is to ensure the other side has as little to bargain with as possible.
Saying I Do
If both buyer and seller have made the journey through the due diligence process, it’s time to take that final walk down the aisle and come away with a signed deal. Our goal at ECG is to ensure that you and your company are protected throughout this entire process, and you walk away with the best terms and most money in your pocket possible.
But the process of exiting doesn’t end there.
Much like the new married couple will find out, work on the relationship continues after the ceremony. Oftentimes, the owner will stay on for a period during the transition. Additionally, there is still work to be done around closing accounts and transferring ownership. One of the differences of working with our team at ECG compared to a business broker is that we stick with you until this process is completely done.
If you’re curious to see how the Exit Consulting difference might help you sell your business, contact us today.