You’ve nurtured your “business baby” for years and years and know all about it. Consequently, only you have knowledge of unrecorded company processes and procedures. You have information in your head that the buyer wants to know. In fact, his team is probably asking, “What are we missing?” The due diligence process after the buyer issues a Letter of Intent and during the drafting of the purchase agreement is perhaps one of the most stressful dealings for the business seller. Candidly, that’s because the buyer is trying to figure out why your company is not worth what you think it’s worth. The buyer is digging up dirt on your business while you’re trying to remain calm under pressure. In this post, I’m going to walk you through 6 steps in a due diligence process that will help you navigate these murky waters and finalize that protective purchase agreement.
One of the funniest examples of due diligence I can remember came in the form of a baby seat purchase. Some of my dear friends were expecting their first baby, and Daddy was bound and determined that only the best car seat would do for his new “peanut.”
For months, my friend exercised the due diligence process. He went online and found specifics about every car seat currently on the market. Then, he built an Excel spreadsheet around the information. He categorized each and every feature of the seat – ease of use, restraint bandwidth, type of fabric, etc.
It didn’t even stop there! He actually purchased all three top car seats he identified from his spreadsheet and put them through his own type of product testing. He even went as far as throwing each seat down a mountain with a doll strapped in its restraints. As you can imagine, I gave him a hard time over the entire thing.
“The buyers’ goal during the due diligence process is to show the seller how ugly his business is so they don’t have to pay full price for it.” – Justin GoodbreadClick to tweet
Most likely, buyers will also send their advisors in to review the different areas of your business. They’ll research your operations, your sales, your marketing, your finances, and your deliveries. They may even ask to speak to your key employees. And after all of that, buyers will still quiz you about everything they’ve learned thus far in the process. Remember, their goal is to show you how ugly your business is so that they don’t have to pay full price for it.
The due diligence process can make or break your business sale. So how are we to approach it? If it’s that stressful, is there anything we can do that will make the situation better? Well, I’ve compiled 6 ways to make the due diligence process a little more relaxing.
To anticipate what buyers will request from you, write out a list of everything you would want to know about your business if you were the buyer. Then, compile, organize, and prepare the documents, reports, and data for the buyer’s team.
Remember, preparation is part of this equation. Anticipation without preparation only increases your stress level when you’re working with deadlines and big money. Having things like operating agreements, lease agreements, loan documentation, contracts, tax returns, KPIs, pro formas, Profit & Loss Statements, and Balance Sheets will help speed the due diligence process along. If you cannot or do not comply with buyer requests quickly, the buyer can attempt to wear you down as you drag your feet. Essentially, the buyer can use your inefficiency as a way to pay less for your business.
Yes, due diligence will take some time. But if you’ve been preparing for it, you should know what most buyers will want. Believe it or not, they WILL find the things you don’t want them to find. Just be prepared for it. In fact, if you want to nip it in the bud, go ahead and give them the information about the skeletons in the closet. It’s okay; they’ll find out anyway.
If you make the due diligence event part of your business exit process, you can set guidelines. You can require the buyer to provide you with all of their requests at one time rather than in piecemeal format. Again, the buyer is trying to wear you down to get a lower purchase price. If he can make you take time away from operating your business over and over by asking for minuscule things, he can gain a psychological advantage over you.
By setting parameters from the beginning, your team can help you set timelines and limits to the number buyer requests and on your responses to the requests. Although buyer’s teams may kick-back a bit, I’ve found that if you schedule out the events within the due diligence procedures, the process moves along quicker and doesn’t tend to get bogged down.
Since you’re trying to provide all necessary documents at one time, you want to include a table of contents at the top of your set of pages. This will hold you accountable for what’s in your paperwork, and it will prevent the buyer from claiming he didn’t receive a particular report. Potentially, this simple step could save you hours of time and thousands of dollars in legal fees to re-organize and resend documents.
I heard someone say years ago that “You should never tell a woman her baby is ugly. If you do, prepare to run because Mama’s gonna smack you down.” Well friends, your business is your baby, and you will become a mad mama when someone attacks your business. How dare the buyer say your business isn’t operating at peak efficiency or your team isn’t doing things they should be doing. You get the picture.
As part of the due diligence process, the buyer is going to point out your ugly baby. Your business is going to be fully exposed, so go ahead and get ready for it. The buyer will point out all of the weaknesses in your business. Then, he’ll dwell on those weaknesses to convince you that your business is not worth the millions of dollars he offered you in his Letter of Intent.
So just be prepared. The buyer’s going to tell you your baby’s ugly, and you need to be ready to fight back.
Many times, the due diligence process can drag on for months and months. You’ll get frustrated. I’ve been there. I know how frustrating and stressful it can be. This process can stir up all kinds of emotions. And truthfully, some buyers hope to get you all worked up. If you’re emotionally weary or frustrated, they believe they can sway your resolve.
As the old saying goes, now is when you’ve got to “kill them with kindness.” You’ve got to remember that the buyer’s goal in the due diligence process is to fully expose the ugliness of your business to validate a reduction in the purchase price. However, you want to be kind while you remain firm fighting for your ugly baby.
Your kindness might catch the buyer off guard and convince him that you are worth the original purchase price even if your business has flaws. If you can maintain a clear head and a kind heart during this sometimes ugly process, the buyer might be more likely to give you the benefit of the doubt or be kinder in his own assertions about your company.
If there’s an earnout, buyout, or seller-carried note within the purchase agreement, now is the time you want to conduct your own due diligence, almost like counter-surveillance. In this case, though, you will need to tell the buyer exactly what you’re going to do. You’ll be relying on the buyer to provide your earnout, your buyout, your seller-carried note, or your salaried contract. Therefore, you have permission to ask for the buyer’s payment history. Maybe you ask for permission to run a credit report or a background check. In my opinion, what’s “good for the goose is good for the gander.”
To me, due diligence is a tedious, stressful process. To help you through it, I’ve given you 6 steps in the due diligence process that can help reduce everyone’s stress. So go ahead. Let the buyer bring in his inspectors. Have him throw the baby’s car seat down the hill, if you will. It’s okay. If he wants to see the business four times before the closing date, let him.
Part of the due diligence process is full exposure. If you’re aware of that when you begin, you can cope with any repairs that are needed or price adjustments that are made.
Obviously, there’s a lot more to surviving this due diligence process than the six steps I gave you. I’m just giving you a high-level review here. If you find yourself in this phase, enjoy it. It can actually be tons of fun if you know how to play the game.