InSight

Exit and Growth Strategies for Middle Market Businesses

When Will The Buyer Stop Asking All These Annoying Questions?

By Robert St. Germain | Mar 19, 2018

Business sellers often reach the point in the sale process where, in complete exasperation, they start asking the above question of their investment bankers.

The short answer is that questions will be put to the business seller by the impending buyer right up to closing.

Yes, the due diligence phase of the business buy/sell process can be very demanding and very frustrating, especially for the seller. For the first time, they are being asked to share what previously had been closely guarded information with whom are, likely, complete strangers. And that goes against every natural instinct of sellers for whom, theretofore, absolute secrecy was the order of the day to keep any and all info that could possibly be used to their disadvantage from employees, suppliers, customers, and competitors.

On the other hand, the seller must understand that it is the buyer who will be taking on the responsibility for a lot of capital in some combination of debt and equity to make the acquisition. So, the primary reason for all those “annoying” questions is to help the buyer assess the likelihood of replicating or improving historic cash flows to support the debt component of the capital package while generating the necessary return on the equity component.

Those capital components typically will be provided, in part, by the buyer and, in part, by third parties in the form of at least one lender and, perhaps, at least another equity investor. Each supplier of capital to the transaction will have their own set of questions coming from their own unique perspectives. Additionally, each supplier of capital will be assisted by their own set of advisors who will each have their own set of questions to protect the interests of their respective clients.

In aggregate, there will be many questions, some of which the seller very likely will never have asked themselves during their ownership tenure, and some of which will require an extra work effort to answer.

Sellers that engage the services of investment bankers (IB) to lead them through the sale process will be advised in advance of what to expect during DD and how to prepare.  Further and very importantly, the IB will advise the seller both on how to legally protect themselves from compromise in the information exchange and how to stage the release of various types of information only to when it is absolutely necessary to the process.


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