“In God we trust; all others bring data” is a famous quote from W. Edwards Deming that emphasizes the importance of data analysis in business decision making. The due diligence process is a critical part of every M&A transaction, and in today’s data-driven world, having relevant and accurate company data has never been more important. Buyer due diligence has become increasingly thorough and wide ranging over the 20 years that I’ve been advising sellers. Contributing factors are advancements in ERP, CRM and BI systems, more laws and regulations to comply with, increased globalization, increased reliance on intellectual property and growing cybersecurity risks to name a few. This post provides a brief due diligence survival guide for company owners looking to sell or recapitalize.
Tips for surviving an M&A due diligence process:
You should start preparing for due diligence well in advance of the sale process by becoming equipped and well-prepared with accurate and reliable data. Compile all the necessary information, including financial statements and accounting records, contracts, leases, tax filings, HR records, legal records, customer, supplier and transaction data, and lots of detailed operational data. An M&A advisor can recommend the appropriate documents and reports to collect and can evaluate your state of readiness.
Conduct an IT audit
If your expected sale is a few years away, an IT audit can help you identify system limitations, highlight opportunities for improvement, and make informed decisions about what updates or upgrades to make. By modernizing software, implementing BI tools and cybersecurity measures, upgrading hardware, using data analytics to drive your business, and investing in training, you will increase the chances of a successful due diligence process and sale.
Present information in an organized and professional manner and make it easily accessible to the buyer. This will make it easier for the buyer to understand the information and will help save time and keep your sale process moving forward. It also demonstrates that you have a handle on your business and shows your attention to detail and professionalism. M&A advisors typically provide a sample due diligence list and organize everything for you in a virtual data room.
Be transparent and forthcoming with information during the due diligence process. The buyer will be hunting for red flags and discrepancies in the data. By providing full information and being transparent and honest, you will build trust and credibility, help avoid potential transaction roadblocks, and reduce unpleasant and potentially costly surprises later on. Your M&A advisor and attorney can advise you on how and when to disclose certain sensitive information.
Buyers will have lots of questions to understand your business and the data that you provide. Anticipating their questions and addressing them up front (in a Confidential Information Memorandum or virtual data room exhibits) and having ready answers helps everyone navigate the sale process more smoothly and reduces the time it takes to complete due diligence. A seasoned M&A advisor will know what to communicate and when.
Work with a team
Assemble a team of competent advisors — an M&A attorney, CPA and M&A advisor at minimum — to help you navigate the due diligence process. They can provide guidance, answer questions, and help you avoid potential pitfalls. Having the right internal staff involved is also crucial. An M&A advisor can help assemble and organize your team, reduce the burden on you, and minimize the risk of a failed process.
The overarching goal of due diligence is to help the buyer confirm their decision to proceed to a transaction closing on the price and terms agreed upon in the LOI. Stay focused on this goal, don’t get discouraged by what seems like an endless onslaught of requests, and resist getting sidetracked. Due diligence is just one part of the sale process. M&A advisors manage the overall process and work with deal participants to keep things moving forward in parallel.
Inevitably, issues arise during the due diligence process and that need to be researched and resolved or worked around in order to keep the sale moving forward. Be ready to pivot and prepared to negotiate.
In summary, surviving due diligence in a business sale requires preparation, organization, robust IT systems, transparency, proactivity, flexibility, and experience. By following these tips, you can help to ensure that your due diligence process goes smoothly. And if you take to heart, “In God we trust; all others bring data”, you will be well on your way to a successful business sale.
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For further information on M&A due diligence requirements or to discuss a potential business sale, merger or acquisition need, confidentially, contact Al Statz at 707-781-8580 or email@example.com.