Consider these two scenarios:
Scenario A: A seller and buyer are really excited to move a sale along. Some information is shared, a letter of intent is signed, and then the buyer along with their lenders, lawyers and other advisors start asking for more detailed information – this is the confirmatory “due diligence” process.
As the seller starts pulling data together, they discover that a lot is actually outdated or even missing. Maybe some customer or supplier contracts have expired, quarterly tax filings have been missed, no one knows when the software was last upgraded, the employee handbook is outdated and so on.
Information keeps getting to the buyer late. Some of the data is not as expected, and the buyer brings up the dreaded “renegotiation”. Momentum slows, giving the buyer time to think, “Do I really want to do this?”
Scenario B: The seller has almost all detailed information ready when the letter of intent is signed, so “due diligence” becomes a process of confirmation, not discovery. The lawyers, the bankers, and the buyer can all work together, and the sale is complete within a reasonable time frame.
Readiness is critical to deal success. Better preparation means a faster, smoother sale, which is almost always beneficial for buyer and seller alike. Trust us, these scenarios are not exaggerations. Strong due diligence preparation before the letter of intent can cut the time to close in half, and – more importantly – makes the closing more likely to actually happen.
Selling a business takes a long time, and it’s easy to put important things off, especially when actually running the business demands 100% of your attention. You may think: “I don’t have to worry about due diligence until after a letter of intent,” but we recommend that you start now to get it all together.
Getting it all together
Due diligence generally includes the following broad categories:
- Financials
- Taxes
- Legal and regulatory compliance
- Environmental compliance
- Human Resources
- Contracts with customers, suppliers and service providers
- Systems and processes / IT
- Customer information
- Real estate
- Operations and assets
This is a generic list and will vary based on the industry and specific requests from the buyer. Still, most of these are common to any deal, so there’s no reason to wait for a letter of intent to gather and organize the necessary data.
A few sensitive items – such as customer lists and some employee files – can usually wait until the deal is almost complete.
Additional Measures
You can do a few more things to move the due diligence process along:
- Ensure convenience and security. Several inexpensive, cloud based platforms let you share private data. These virtual data rooms are designed for M&A transactions and allow the administrator to limit access to essential personnel. Blowing confidentiality is a surefire way to end a deal.
- Keep information up to date. Any “diligent” buyer will want to see the latest monthly financials, employee rosters, compliance reports, etc. And don’t hide anything because it may look bad. Such information will eventually come to light and can be the source of a future lawsuit.
- Have a “due diligence” project manager. You probably don’t have time to update data and interface with all the people (from both sides) that need information. This function is typically performed by your investment banker who is handling the deal.
- Be patient. Even relatively simple deals involve what may seem like unusual data requests, but rest assured, there is a reason why the buyer or their lenders and advisors need to see the information. Due diligence can take weeks, if not months, especially if the deal is large or complicated (or both).
In the end, you control the due diligence process. If you start the process now, you’ll pave the way to a smooth, secure closing.
