Inadequate Preparation for Due Diligence When Selling a Business
In the last issue (#78) we discussed the obstacle: Trust Issues from Inadequate Disclosures before Due Diligence. In this issue we will discuss a similar obstacle with a related theme: your intermediary should anticipate and help you overcome Inadequate Preparation for Due Diligence.
"You win not by chance, but by preparation." Roger Maris
Inadequate Preparation for Due Diligence When Selling a Business
The typical seller, and even the typical broker, dreads the due diligence phase. You are not going to successfully sell the business without enduring due diligence, so you might as well embrace it. You’ve received an offer and a successful closing is just around the corner – if you have adequately prepared and handle due diligence appropriately.
With proper preparation, negative surprises during due diligence can be eliminated or minimized and business sales can be relatively painless.
Historically, many transactions fall apart during due diligence because negative surprises arise. As discussed in the previous issue, Trust Issues from Inadequate Disclosures before Due Diligence, the key to surviving the process is to eliminate foreseeable setbacks by disclosing any negative issues early, before due diligence ever begins. Disclosure allows you to present not only the problems faced by the business, but also possible solutions and opportunities for improvement. Buyers will appreciate your candor and you will begin to earn their trust.
You should start preparing for due diligence when you begin considering a decision to sell. Identify and resolve as many obstacles and issues as you can before putting your business up for sale. For those that you cannot resolve prior to selling the business, disclose the issues and position them in the most favorable way. To avoid surprises (deal killers), you should also disclose problems that you are unable to adequately position as opportunities.
Voluntarily provide a comprehensive due diligence package
The key to surviving due diligence is preparation. Discuss the contents of a standard due diligence list with your intermediary and other advisors. Determine which items apply to your business and are likely to be requested by the buyer. Once a mutually agreeable offer has been negotiated, surprise the buyer by voluntarily providing a due diligence package you have prepared that addresses most of what you anticipate will be requested. If the package contains more information than the buyer might request, so much the better. You will earn the buyer’s trust. Then, if and when unknown negative surprises arise, your trustworthy relationship will be a huge benefit in finding ways to resolve setbacks.
Respond to due diligence questions on a timely basis
The passage of time always works against the successful closing of a business sale transaction. If you or your advisors dither in responding to a buyer, it creates a harmful impression in the buyer’s mind: “Why is the seller taking so long to respond? What’s going on? Are they manipulating information? Have I uncovered something they do not want to discuss or disclose?” If you are unable to respond quickly, it is extremely important to immediately communicate why, and when the buyer can expect a response.
Unknown issues can be resolved if the buyer feels you've earned his trust
What about unknown issues? They do arise and can create significant problems. If you have developed a trusting relationship through early disclosure of the known issues, it will be easier to work with the buyer to address unknown setbacks that occur. If unknown problems surface along with known but undisclosed issues due to trust concerns, a successful conclusion is highly doubtful.
Treat the buyer as your largest customer
It is important to be completely open, cooperative and straightforward. Think of the buyer as your largest customer and make his needs your top priority. In this one transaction, the buyer of your business is buying more than your largest customer ever bought in one transaction!
Arriving at the due diligence stage is one of the best moments in your life. You may be within mere weeks of the biggest payday you’ve ever had. If you have properly prepared, due diligence can feel like an administrative process that enables you to confirm to the buyer just how great your business really is!
To recap, here's how to prepare for the due diligence process:
1) Identify any obstacles to a successful sale before you put the business on the market.
2) Address and resolve as many of the identified obstacles as you can before selling your business.
3) Disclose unresolved issues up front, presenting them in the best possible light along with possible solutions and opportunities for improvement.
4) Avoid due diligence surprises by disclosing all known issues, regardless of your ability to position them as opportunities.
5) Develop a trustworthy relationship with the buyer to enable you to resolve unknown negative surprises that might arise.
6) Prepare for due diligence by reviewing a standard due diligence list with your intermediary and advisors.
7) Surprise the buyer by voluntarily preparing a due diligence package addressing most of, or even more than, what you anticipate the buyer will request.
8) Be sure you and your advisors respond to due diligence requests on a timely basis.
9) Have a positive mental attitude: you are just weeks away from a huge payday!
Even if successfully sold, when negative surprises arise in due diligence, it is ……
