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Due Diligence at the Business Show - Article 3 of 3

Due Diligence at the Business Show – Article 3 of 3

Many readers will be very experienced in the subject of due diligence (“DD”) but this series of articles is derived from a presentation given at the Business Show at ExCel in November 2018 and is geared towards the sme business owner selling a business who has had little experience of the DD process. Anderson Shaw are business brokers specialising in the SME marketplace and offer business transfer agent support services throughout the UK.

This is the third and last in a series of three articles in relation to the DD process.

There are some specialised areas in your business that you should consider carefully in relation to how you handle the DD process.

Very topical at present are the issues of data management and GDPR; even for smaller deals, Buyers are looking for strong data security controls being in place and a valid GDPR policy, plus evidence of them all actually being operated.

If you have any valuable IP in the business you need to highlight this and show how you go about controlling your rights. This is a very technical area and you may well need specialist advice to ensure you have robust policies and controls in place. If you’re not safeguarding your assets then a Buyer may see less worth in your business.

These will be areas covered in the DD process and quite often sme business owners may not have the expertise to deal with any enquiries; it’s worth getting specialist help to handle the DD from your end if you feel it will add value to your sales proposition.

As mentioned before, the DD process can stretch on and on … there may be some issues that are found and it may take you several weeks to properly respond back to these issues; by this time the business has moved on and other issues may be found and the likelihood is that you will have passed another month end so need to produce updated financials … which then need to be disclosed to the Buyer and subject to their further DD review. There have been examples of the sale of an sme business where the DD process continued on for 12 months, yes a full 12 months. This was due to several issues, albeit each of them not deal-breakers, but each significant enough to warrant detailed questioning by the Buyer and response by the Seller. This can be pretty tortuous for the Sellers. In hindsight what could be done differently; well certainly better preparation and identification of these potential issues ahead of and having adequate responses to them before the DD process started. This is where the principle suggested previously of trying to review your own business as if you were a potential external third party Buyer ahead of the full blown sales process starts off can be very useful.

The good news is that this is a process and as with all processes … it comes to an end!

Try not to allow yourself to get too high or too low during the process. 

The sale process and in particular the DD process, is a roller coaster ride, with ups and downs around every turn as a deal you think is wrapped up one day falls apart the next day . . . only to come back together on the third day.

You have to be able to keep an even keel.

Unfortunately, overall up to 50% of deals that get to HoT’s do not complete.

Mainly this will be due to unforeseen circumstances, the main one being a drop-in trading causing the financials to weaken (this could be loss of a major customer / not winning the deal that was expected etc) or some external / legislative changes (financial crisis / BREXIT/ PAYE regulation changes etc).

Remember that the DD alone can take at least 3 months so there are going to be 3 sets of management accounts that get produced over this time (at least).

Or it may be due to some DD issue.

But the failure may be just that the seller gets fed up with the level of questions being asked / the time its taking or that they’ve found something in the production of the DD info. That is a problem and they need to deal with it ahead of telling the buyer.

The buyer may similarly pull out if the time to get the DD responses is too long.

Time generally makes deals harder to complete.

Even those with the most experienced in M&A and who know that it is a middle-distance race not a sprint can get just simply fed up with it.

In summary then, forewarned is forearmed and when you do get to this stage in the sale process try to prepare yourself as best as you are able.

Remember the government health warning – you will not enjoy this part of the process and the following steps are key:

 

  1. Mentally prepare for a tough time
  2. Expect the DD to take at least 3 months
  3. Get your advisers on board and fully briefed as soon as possible and as far in advance of the DD starting as you can
  4. Ask your advisers for examples of what they’ve come across before in their DD experience
  5. Try to do a mock run through of what you’d want to look at if you were the Buyer
  6. Start preparing your DD documents well before the DD starts
  7. Set up your own data room to put these documents
  8. Bring as many of your team into your confidence and involve them in getting the DD information together – if you try to do it all yourself you’re going to at the very least flounder and at worst sink
  9. Don’t take the questioning to heart – remember not all babies are pretty and being told yours isn’t may not be far off the truth but keep in mind your overall objective
  10. To repeat the message again, mentally prepare for a tough time .. but use your advisers to help here as well .. they’ve done this many more times than you have

DD is not rocket science and can be managed to ensure it proceeds as smoothly as possible. Preparation is the key, together with an understanding of the process and the needs of the Buyer. Put all this in place and you will succeed in getting to the end of the DD process without it causing your sale to fall over, but remember this will need you, as the Seller, managing it through to the end and keeping yourself on an even keel whilst it takes place.

As business brokers, we at Anderson Shaw Corporate Finance Ltd, are always happy to advise business owners about any aspect of selling a business and the processes involved. If you are thinking of selling your business, now or in the future, please contact us for a confidential, no commitment conversation. We will be pleased to provide a business valuation and discuss your plans in relation to your business.

 

 

 

 


Anderson Shaw has offices on the outskirts of Coventry and provides business broker and corporate finance services for clients throughout the Midlands and the UK.

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