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How Due Diligence Dictates the Deal

5/12/20 – Ely Friedman

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Due diligence starts with the first call or meeting with a prospective buyer or investor. You only have one chance at making a good first impression, and how your story is delivered is important. Your ability to effectively deliver that message will invigorate a buyer’s excitement in the opportunity. Today, buyers and investors have the patience of a hungry five-year-old. They have one thing on their minds; a deal. If you aren’t prepared with the items they need to review, they won’t wait long before determining you’re either 1) not genuinely interested or 2) not ready. Be wary of those that hang around and act interested – they are likely bottom-feeders, only interested in a discounted deal.

While we discussed some of these topics in an earlier article, ‘Why “Sorta” Wanting to Sell Your Business “Sorta” Doesn’t Work Well in a Full Sell-Side Process’, it’s of the utmost importance to fully understand that due diligence on a company is an arduous part of a deal. This is nothing like selling a house, car, or undertaking a large contract. There is an abundance of information that is requested and, for your benefit, a tight timeline in which to deliver that information: approximately 60 to 90 days. The longer the diligence period is, the more questions and requests arise. As a result, ‘deal fatigue’ will set in. This is frustrating for buyers and sellers alike. Sellers grow tired of the additional requests and buyers come up with areas of concern or worse, areas to decrease value.

Preparedness and organization set the tone and pace for the diligence process. They also demonstrate the potential threat to a buyer that, if they don’t comply with the timeline or expectations of the seller, the information is readily available for an alternative buyer. Utilizing a secure, virtual data room, which is organized in various categories such as Legal, Insurance, Operations, and Finance, are great ways to demonstrate professionalism and preparedness as the diligence process initiates.

Would you pay more for a dirty car than a clean car? Of course not! Therefore, you cannot expect a higher valuation for an unorganized business. If a buyer is asking for 100 items and you are only prepared with ten, the inability to respond in a reasonable amount of time can cause the buyer to question whether they offered too much for the company. Being prepared and organized doesn’t change how profitable the company is or how great the people are, but it does help the buyer get excited and feel affirmed about their investment. Excitement helps bring higher valuations. Keeping the buyer satisfied with ample data points allows them to consider different areas of growth and can prevent negative ideas from arising as to why you don’t already have the information prepared or that you are avoiding making it available.

Other considerations for how diligence dictates the deal are cost and time. Selling a business costs money and takes time. Expenses should be budgeted for additional support services such as legal, accounting, M&A advisory, and wealth management. The more this process (and the associated costs) can be reduced, the better. The most important time to avoid these costs is near closing. If you are set to close at the end of the month but there are unanswered or incomplete items, the closing date will be pushed into the following month and the buyer will require an ‘update’. This usually means the buyer will want more recent financial and business performance metrics. This results in additional work and costs for both seller and buyer.

My advice to any business owner either considering selling or receiving interest from prospective buyers is this:

  • Organize your information and commit yourself to the process.
  • Diligence is very intense and extremely exhausting. Anyone who has been through it has the scars to prove it.
  • Fumbling through diligence can cause a buyer to decrease their offer or lose interest entirely. Be prepared.

…because due diligence dictates the deal!

For any questions related to the due diligence process, or sales and acquisitions in general, contact VonLehman’s M&A experts today at kcarlson@vlcpa.com or 800.887.0437.