InSight

Exit and Growth Strategies for Middle Market Businesses

Due Diligence – Who is in Control?

By Terry Fick | Jun 29, 2015

ControlThe answer to that is actually in the hands of the business seller. How can that be?  Well, the seller that looks through the eyes of the buyer early in the sale process and does something with that perspective will control the process. Those that don’t let the buyer control the process.  So who cares?  The seller should care the most because elongated due diligence always costs the seller money and far too often, the entire deal.

If due diligence starts with the LOI, the buyer is in charge.  If the seller has prepared in advance, and the buyer knows this, the seller is in charge.  By having already pointed out the warts, or perceived warts, you steal the buyer’s thunder.  By presenting an indexed data room with all of the information you believe the buyer will ask, the seller takes control.  Sure, the buyer will always have more questions, but they will be minor.

Price Waterhouse conducted an extensive survey of CEOs and CFOs  who had completed deals, “What would have most favorably impacted your deal?”  The number one response was “The seller providing more detailed information in due diligence.” The number two response was “Being able to do more pre-contract due diligence.”  Another comment was, “The more comfortable I am that Due Diligence will go well, the more interested I am in the company.”  We all know that the tidier the due diligence process, the faster it moves, and time is very expensive to the seller.

Sellers always have to answer the due diligence questions pertinent to their industry at some point in the sale process, so why not do it before going to market and accomplish three very important things:

  1. Minimize the possibility that the buyer will find damaging information toward the end of the process.  When the buyer finds this information (and he will), the damage is much greater than if the seller presents it earlier.
  2. Enable you to have the time to work on any issues a buyer may find to be negative.  Identify them all, fix what you can, minimize what you can, and explain the rest.
  3. Start to impress the buyers from the beginning that you are on top of all aspects of your business, that you know your shortcomings (his opportunities), and you have ready access to the detailed management information he will want to see.

Remember the old “Golden Rule” adage “Whoever controls the gold, makes the rules?” Well, maybe that should be updated to “Whoever controls the Data Room, makes the rules.”

Posted by Terry Fick.

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