So what are the key considerations in getting the due diligence right, and how do you manage the process while maintaining business as usual?
The formal accounting “bricks” such as maintainable earnings, asset value, cash flow and multiples can really only provide a benchmark against which to base and measure an offer. The integrity of the data behind the valuation will be tested during the due diligence process, and personal and professional judgement will be required.
The prospective purchaser will typically be looking for synergies, future income flow or capital growth or a combination of these; and the price needs to represent a better return for them than would be achieved from investing the same amount in another business.
In short, a valuation from a vendor’s perspective will often focus more on the science of valuation, and from a purchaser’s perspective will often focus more of the art and emotional ties. At the end of the day, the objective due diligence (DD) process is king and should resolve any conflicting ideas.
In an ideal world, the sale of the business you have put your heart and soul into will be part of your long term planning, and it will already have been groomed for sale. Your processes and records will be in good order and due diligence will not be disruptive. In practice, however, this is rarely the case.
DD is often the least favourite part of the deal process. It can be stressful and time consuming and by the end of it you can often be left wondering why you decided to sell the business and put yourself through this. But remember, the purchaser will need certain information in order to be comfortable completing a deal at an agreed price and so thorough DD cannot be avoided.
In my experience, a buyer is often more worried about the risks of making an unsuccessful acquisition than they are excited about the potential gains from a successful deal. So getting the DD right will pay dividends if you want a smooth sale.
Do’s and don’ts of due diligence
- Plan ahead. Bring the “housekeeping” up to date – formalise contracts, HR matters, records etc. – all the things that make the business less risky to the potential purchaser.
- Maintain open channels of communication with your professional advisors as well as the purchaser and their advisors to both speed up the process and build a level of mutual trust and respect which helps a deal progress more smoothly.
- Agree the timetable upfront, establish responsibilities for providing information, and allocate the time needed to do so.
- Use your advisors to do the legwork and reduce the impact on the running of the business, and choose an experienced team.
- Agree fixed fees, if possible,
- Ensure your advisors set up a data room to share information with the purchasers and their advisors (preferably electronically which minimises the cost of and time involved in providing such information).
- Discuss the findings with the purchaser as they arise – there may be misunderstandings or more information required to clear any issues arising.
- Always remember a deal may fall through and as such ‘business as usual’ is key throughout the whole sale process. You may need some help from your finance team but it is always advisable to keep knowledge of a deal to the minimum to avoid a detrimental effect on the business (uncertainty, distraction, job insecurity, potential to lose key staff etc.)
- Spend time and money on detailed vendor DD until asked. The purchaser is unlikely to rely on this and you will still need to spend time presenting the information in the manner required by them and their advisors.
- Assume the deal is done before it is actually completed – DD results can have an important impact on the price and also the decision whether or not to proceed
- Don’t allow the lawyers to spend too much time on matters that aren’t of high importance to the overall deal.
- Don’t be rushed. When discussing the DD findings ensure you are allowed time for a thoughtful and fact-based response. Don’t try and hide any issues within the business until the last minute but ensure that you provide this information with supporting narratives and explanations.
- Don’t agree to changes to the contract too early. Something arising out of the DD later may offset any issues, and even support a higher price.
Above all, get it right. Be quick but don’t hurry.
David Martin is a corporate finance partner at Knill James Chartered Accountants.
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