Avoiding Due Diligence Downfalls

Due diligence is an integral part of any business sale, and also the likeliest stage for a deal to fall through. This is the stage in an M&A process wherein both buyer and seller companies come into intense analysis of the other to see if the purchase is indeed a fit for both parties involved. According to Forbes, 50% of deals end up in failure during due diligence. While this is a steep ratio, you can avoid this when selling your company by being well-prepared to make an exit. Here are things you need to keep in mind to avoid a due diligence downfall.

Take Your Time Before Going to Market

Some owners suddenly decide to sell their companies due to various reasons that may include age, burnout, problems with partners, current business climate and the like. Whatever your reason may be, do not rush into putting your company to market. Other than impacting the possibility of an optimal deal, rushing to get a sale could lead to a myriad of problems down the line of the acquisition process. Put a plan in place before getting in touch with any potential buyers. It greatly helps to engage with an M&A advisor to facilitate the deal and keep things in check. Being impulsive and getting ahead of yourself can result in an abundance of missteps that experts can easily solve. Make sure you do not disregard important issues for the sake of a quick paycheck.

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Clean Your Books

One of the first things a buyer looks at when purchasing a company is the seller’s financial records. Get your books together and make certain that there are no inconsistencies in your data. Disorganized records can lead to unnecessary questions which can be easily avoided by being thorough with your records and balance sheets. It also helps to to have your books converted to GAAP (generally accepted accounting principles), as this is more widely accepted by major investors.

Keep in Mind the Buyer’s Due Diligence Process

Every buyer has a different way of going about the due diligence process. Keep in mind that buyers have most likely done their research on you and your company even before getting in contact with you. As a seller,  you will have many questions and concerns regarding every potential buyer, and you must be aware that a buyer comes into a transaction with these in mind as well. It’s imperative to prepare yourself for any questions that may arise during this stage.

Disclose All Critical Information

When presenting your company to a buyer, it is crucial to disclose any and all critical information that could lead to potential issues that are unearthed during due diligence. This includes vexing customer contracts, any ongoing litigation or complicated receivables. If your company has had problems in the past or has any pending issues, lay all your cards on the table with your potential buyers right from the beginning. Other than weaknesses that are known, make an effort to find those that have not yet been discovered. A great deal of surveyed brokers have said that most problems can be handled as long as they are informed at the beginning of the sale process, so it is imperative that these potential issues are divulged. Any unexpected problems that arise without being disclosed beforehand could lead to distrust and questioning your credibility.

Provide Realistic Forecasts

All buyers would like to ensure that their investment will eventually reap benefits, and your company’s financial projections will play an immense part in considering the purchase of your company. There is a tendency for sellers to overshoot the value of their company. To avoid this, make sure that your financial forecasts are realistic and that there is sufficient historical data to back it up.

Brief Partners and Employees

A buyer may choose to speak with certain members of your organization, and it is compulsory that they are well-informed that a deal is about to develop. Ascertain that key executives and employees will stay in the company after it is acquired, and create incentives for them to do so. Be prudent in disseminating information to key employees, agree on exit strategies with stakeholders and ensure a seamless transition after acquisition. When the most important members of your company are fully cooperative in the due diligence process, you can be assured that any questions from a buyer will be efficiently answered and that your best employees will comply towards the success of the deal.

With the right amount of preparation, transparency and dedication to get the deal done, you can avoid a fallout during the due diligence process and come out with an advantageous deal.

Eric Allison

Eric Allison
Eric Allison is managing partner of Golden One Ventures, a boutique M&A firm catering to the middle market for the staffing and recruiting industry. He can be reached at eric (at) goldenoneventures (dot) com.

Eric Allison

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