How do you conduct Due Diligence for your business sale?

By Generational Equity

02/19/2016

Business owners often ask us what to expect during the 9-18 months it takes to close a deal with a buyer. Although the answer to this question can vary because the nuances and issues faced by sellers are as unique as fingerprints, one common thing can be expected in ALL transactions: a grueling 3-month to 6-month process we call due diligence.

No matter what industry you are in, no matter how well run your business is, and no matter how soundly you have documented your history/future, be prepared to spend HOURS going over 200-300 questions that buyers will provide you once the letter of intent is signed to acquire your business.

This stage of the business sale cycle is so intense that there is an old saying in our industry: A deal isn’t really a deal until it falls apart at least once during due diligence – and that is if you have a qualified M&A professional by your side.

The reality is, based on countless input from Generational Equity (part of the Generational Group) clients, no matter how well we prepare our clients’ businesses for due diligence and no matter how well we prep our clients personally for the mentally grueling process, until you go through it, you have no idea what it is like. Don’t just take my word for it. Listen to input from a sampling of clients who have successfully traversed the process with us:

• The Challenges of Closing a Deal
• The Benefits of Having Generational Equity By Your Side
• What a Seller Should Expect During A Deal Close
• “But I Am Ready”

You may be wondering why, if you do your homework in advance and have prepared documentation in the form of an evaluation and offering memorandum, is due diligence so painful and difficult? Simply because any reputable buyer, before investing in a privately held company, will need verification that the business they are looking at:

• Is ready to sell (buyer ready)
• Has financials in order
• Has no pending legal issues
• Has projected growth that is achievable

Sometimes our clients get upset and take these in-depth questions very personally. They often wonder: Why are they asking me so many questions about our financials? My word is my bond, don’t they trust me? This is the HUGE advantage of hiring Generational Equity to work for you; not only can we explain to you why the buyer is asking for your accounts receivable from 2012 but we can also, based on our experience, push back on the buyer if the questions are unreasonable or, in some cases, not applicable. If you are negotiating on your own, learning on the job how to close a deal, you could eventually take something personally and blow up the deal with a tirade. 

Our dealmakers specialize in taking your tirades instead of the buyer getting them.

The second issue to consider as you look at due diligence is this: As with most sales processes, time is a deal killer. That is, the longer a deal takes to close, the more deviations from the path into the weeds of due diligence minutiae, the greater the chances that something will happen to affect the deal actually closing. 

This concept is simply a matter of time over energy. Buyers are by and large patient folks, but the one thing that they don’t have in abundance is time. Professional buyers may be looking at several opportunities simultaneously and if yours begins to drag on, if you are unable, for example, to answer questions in a timely fashion that to them are vital, the odds of them canceling the transaction and moving on to a more viable opportunity rise.

During due diligence you want to avoid the abyss of time wasting and keep your transaction on track. Again, another advantage of hiring Generational Equity to do the heavy lifting for you: Our deal teams are extremely experienced in actually closing deals. Unlike your local business broker or your Cousin Larry (who sold his liquor store to your Uncle Carl in 1963), our dealmakers know how to delicately navigate the due diligence waters, keeping both our clients sane and buyers informed and on track.

Time and space (and my editors) do not allow me to go into all the details that encompass due diligence. Suffice to say be prepared for the most grueling 3-6 months of your life. If you would like to learn more about how to survive it, attending a Generational Equity M&A seminar makes tremendous sense. Our seminar leaders and managing directors that conduct these have years of experience in working with business owners just like you and can provide you with more details about due diligence and how to survive it.

Carl Doerksen is the Director of Corporate Development at Generational Equity.