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The due diligence process is used in M&A as a rigorous analysis of all aspects of the prospective business that allows the buyer to see the full scope of a company that they plan to purchase. The main purpose of due diligence is to mitigate risk for the buyer by qualifying it for financial performance, analysis of client and vendor relationships, test proprietary and patented products, and processes, etc. It is important for both parties to be aware that the process can often take several months due to the depth in which due diligence analyzes the company in question. Poor results in due diligence is perhaps the number one reason that many M&A deals fail. Due to the complexity involved in M&A transactions, it is essential that the company’s records will satisfy the most critical review.
This is why it is imperative for the seller to be completely honest about all debts and company shortcomings during the due diligence process; in order to avoid the buyer uncovering negative details that ruin the deal. Oftentimes when the seller is transparent about these problems, a compromise can be made. By fully disclosing all items, not only are issues addressed, but this honesty builds trust between the buyer and the seller. An excellent way to be sure that the due diligence process is completed is for the seller to prepare the company for the process. The following list outlines steps that a business owner should take when preparing for due diligence.
Be sure that all files are easily accessible and sorted digitally. Scan all hard copies, as this will greatly speed up the process, rather than having to file through piles of paperwork when the time comes. Fortunately, most of the information that the buyer will request is already what the business should be collecting on a regular basis; such as revenues, tax records, and employee benefits.
Long before the due diligence process, the seller should be making sure that all company documents are kept in an orderly fashion. Not only is this helpful to everyday operations, but it illustrates positive business practices. The buyer will be pleased to find organized materials as the process commences. In fact, if the buyer is able to breeze through the due diligence process, they may consider raising the sale price.
If you are currently having your CPA prepare compiled financial statements, spending a little for a review or to be more thorough, an audit, can add considerable value to your firm. Not only will this alert the business owner of any issues to sort out before the process begins, but it can also help present the company in its best light.
Assign a specific person or team to be in charge of assisting the buyer with due diligence. As a business owner, it may be difficult to set aside enough time to spend on due diligence without any assistance. Assigning a person or management team to work with the buyer and his or her task force will best facilitate the process. They should be in constant contact with the representatives of the other team. All questions should be logged in a spreadsheet for organization and record keeping purposes. Prepare the team to address any questions candidly and give them access to all information that the buyer may request.
The seller will likely also need to employ the assistance of an accountant and a lawyer to complete due diligence.
Providing all of the information is a crucial step that deems repeating. Do not hide any details in hopes that the buyer will overlook it. Especially in uncertain economic times, buyers are thorough in their due diligence. Stay a step ahead of the buyer and anticipate all of the information that they will seek out during the process. If the seller can be proactive, he or she will establish a positive relationship with the buyer and any less-than-ideal situations will have the chance to be remedied.
Not only will the buyer ask to see financial records, but they will investigate intangible assets as well. Arrange all patents, copyrights, etc., as well as intelligence such as relationships with customers, employee credentials, and valuable skills from the managerial staff.
Reverse due diligence occurs when the seller hires a professional to present relevant information that is most noteworthy to the buyer. This may prove to be a viable option when the business has not been recently audited. Many sellers opt to utilize reverse due diligence when they feel that the company has something substantial to offer aside from what is illustrated by financial records.
Communication is key when it comes to the M&A process, and especially in terms of due diligence. Establishing a sense of confidence with the buyer will improve the chances of implementing a successful deal. If you are a business owner currently planning an exit strategy, remember to incorporate preparation for due diligence into your goals. Organizing all of the necessary information and documents in an easy-to-navigate manner may help raise the sale price of your business as well as maintain a satisfied buyer. If you have any questions on due diligence or any other aspect of the M&A industry, please contact one of our M&A professionals at George & Company in complete confidence.