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  • Accounting for Transition

    Game Plan

    In-Depth

    Do Your Due Diligence

    More than 90% of sell-side due diligence involves anticipating what information buyers will be asking for, and assembling it in a way that makes the case for your business as powerfully and accurately as possible. The other 10% focuses on researching your potential acquirer—in case you remain involved either with the financing or in a consultative capacity.

    What Do Buyers Want?
    Buyers want to see every bit of material information available about your business. SCORE has a 16-point checklist of requirements that includes everything from financial statements and inventories of your inventory and other physical assets, to interviews with your customers and background checks on your officers.

    The core purpose of collecting all this information is, of course, for buyers to really understand what they are acquiring. If your business is relatively simple to understand, the due diligence may be a matter of providing the information the buyer needs to get a commercial bank loan.

    However, there may be more negotiation involved—particularly for more complex businesses. Here, due diligence may be a two-stage process. The preliminary stage leads to both parties signing a letter of intent or term sheet. This document specifies a “starting price,” with more extensive due diligence required to establish the actual selling price.

    Preparation for Negotiation
    You may notice the potential buyer “lawyering up”—although the team could also include forensic accountants and merger and acquisition (M&A) consultants. If this is the case, there’s no doubt that the examination of your business will be extensive, and the information disclosed will be used to provide a basis for a lower selling price.

    As a seller who faces a buyer with an experienced professional team, you’ll certainly want to consider bringing in experts on your side. In theory, that should level the playing field. In general, M&A advisors will tell you to provide all the information required, as accurately as possible. That’s because building trust with the buyer’s team is important.

    In addition, there are proactive steps you can take to show your business in the best light possible. If there are problems, you can choose to fix them proactively. For example, maybe your computer network is outdated and can’t handle your current inventory needs. If you go ahead with the upgrade, then there’s nothing to disclose.

    Game PlanGame Plan

    Game Plan

    • Most of the information on due diligence on the Web presents the issue from the buyer’s perspective. This is actually to your advantage, as you can easily access the questions you’re likely to be asked—and the reasons for them.
    • To find articles on sell-side due diligence, you’ll have to dig into the websites of M&A consultants. These tend to be focused on larger companies, but you can still learn a lot. Take a look at this interactive graphic that Bain Capital uses to illustrate its approach to strategic due diligence. Then read this three-part series by Gary Brooks of ExitPlan Partners called, “Effective Sell-Side Due Diligence.”