Prepare in Advance for Due Diligence

Jack Lyons, Founder and President

By Jack Lyons
President, Lyons Solutions LLC

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My experience has taught me that companies are seldom prepared for due diligence, which means they’re not ready for the process of being sold.

Create Value for Your Company

In today’s slow growth economy, forecasting business performance is easier than at some other times. This makes it a good time for acquisition activity, so opportunities to sell a business may arise unexpectedly. This does present a problem though, because successful acquisitions require the seller to be able to move through the deal process in an organized and timely fashion. Being prepared for due diligence can be a significant factor in whether a deal moves forward or comes to a full stop. The following is a true story about the consequences of not being prepared. We had a client we were seeking to sell several years ago. Our biggest concern was that this client was not prepared for due diligence before we put the company on the market. We had given the client a due diligence list of information to pull together before we went to market. Unfortunately, the client was not able to gather the information before the right buyer appeared. Even after signing the letter of intent, key due diligence information was not available for presentation to the buyer in a timely manner. The buyer pulled the plug on the deal. Eventually the company was sold, but the purchase price was millions of dollars less than what was originally offered. This is just one example of how being prepared for the moment can create value for the owner.

Increase Buyer Confidence

Over the years, we’ve seen transactions delayed or cancelled for preventable reasons like accounting and tax matters that unexpectedly emerged; the appearance of undisclosed commitments and contracts; surprises discovered by the buyer that the seller should either have known about or had hid; family personal activities that were commingled with the operating business; and the inability to produce requested information and documents. Another item that frequently comes up is that the business loses sales and profitability momentum. This can be extremely costly to the seller, but any one of these things can cause a transaction to be re-negotiated or aborted. Every buyer is different, but all buyers are seeking a detailed understanding of what it is that they’re really buying so they can be assured that they’re making a good investment.

A buyer’s confidence in the company being bought can have a big impact on price and deal structure. Lack of buyer confidence means a lower purchase price will be offered than for a deal where the buyer has a high confidence level or significantly less cash at closing.

Know Your Company Better Than the Buyer

In an ideal world, an owner should perform mock due diligence in advance of attempting to sell the company. If the owner were to act like a buyer and dig deeper than the company’s typical reporting, it can have amazing benefits including: finding and correcting deficiencies, understanding the company in a more detailed way, and assistance in tax planning. With respect to tax planning, it is often possible to create after-tax savings if there is a longer lead-time.

Be Ready to Sell at Any Time

In today’s M&A environment, due diligence is becoming increasingly complicated and important. A specialized due diligence team can help prepare a company for a transaction, even if a deal is not planned at the current time. The old adage is that the smart sellers are ready to sell at any time. One never knows what is right around the corner, but always being prepared for due diligence positions you to create and preserve value.

To discuss performing due diligence for your company, call Jack Lyons at (941) 497-4700.

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