Executing due diligence may be the single most important factor in successfully closing an M&A deal. When done right, the process requires a lot of time, resources, and careful planning. It’s worth it; solid execution will bear the fruit of a quicker close with the right partner.
Let’s go over some key tips for sell-side leaders to see their company through a smooth transaction.
Key Factors to Cover:
There’s a lot of due diligence necessary on the part of the seller to close a transaction, but there are some broad categories that should help inform your process. Remember the golden rule: if you were looking to make the major investment of buying a company, what information would you want to have? That should be your minimum mark to hit when preparing due diligence assets.
When getting started, remember that the buyer is looking for:
Your motives to sell are varied, but it’s important to create trust with a prospective buyer by clearly articulating why you’re willing to sell. Common reasons include the founder’s retirement, a desire to pay out shareholders for their investment, or the challenge of competing in a changing market.
Naturally, this question should be navigated with honesty, but without scuttling the sale. You’re required to adequately explain the risks, challenges, and quality of the business, but bemoaning what a nightmare it’s been to run the company is more than you need to express here.
This is a no-brainer, but still worth mentioning. Your financials have to be audit-ready if you’re pursuing a sale. That means clean financial statements with full supporting documentation, going back years.
Management should also attach notes to the financial statements to help the potential buyer create a more textured narrative for your business. Explaining trends in revenue, costs, and the market you operate in will help find the most mutually valuable transaction partner.
Of course, it’s natural to highlight the more enticing aspects of your business, such as a particularly high-growth segment. Just make sure that those highlights are never at the expense of painting a vivid, honest picture of your company.
Though the financials largely speak to the quality and sustainability of your business, you should make sure the prospective buyer has a clear understanding of how you’re positioned at the time of the report. What are the trends in your core offering? Things like changes in profitability, staffing, and revenue should be easy takeaways from your due diligence.
Additionally, the broader environment you operate in should be described and understood. Explain the threats and opportunities your company faces, such as relevant emerging tech and changing consumer tastes.
This pivotal factor, the people who make your company great, might be overlooked by both sides of the sale during due diligence. It is important to explain the organizational structure, key talent, and essential personalities that make your company what it is. Importantly, you should also explain how this picture could change in the event of a sale. As an extreme example, the likely departure of most of the executive suite or R&D team could make a buyer think twice about pursuing the acquisition.
Why does Alibaba, the Chinese tech giant, currently trade at a fraction of similar American companies’ valuation on the NYSE? Part of the reason is less public faith in their numbers, since Chinese firms are not subject to the same audit and financial reporting standards as the United States. The more transparency and trust you cultivate through a solid due diligence process, the higher the valuation you can command.
Transparency may reveal some flaws in your company, but an opaque presentation will raise much bigger red flags. To ensure the accuracy and transparency of your reporting, consider bringing in a third party that specializes in facilitating these transactions.
Make a List, Check it Twice
Due diligence requires thorough planning from the start, with a coherent process ideally carried out by a dedicated team.
While your needs may vary based on the scale and nature of your business, SecureDocs has a Due Diligence Checklist to help guide your group. These are some of the key items that the list checks off, in greater detail for each.
- Corporate Records
- Stockholder Information
- Debt and Equity Issuance
- Financing Documents
- Management Employees
- Financial Information
- Sales and Marketing
- Real Estate
- Intellectual Property
- IT Systems and Networks
- Governmental Regulations and Filing
- Litigation and Audits
That list may look overwhelming, and not all items necessarily apply to your company.
If you don’t feel like your team is currently equipped to execute on this list, you can always find support.
That brings us to a key recommendation: make this an easier process by bringing on professionals to help with it. Additional CPAs, lawyers, and M&A consultants may seem like unnecessary expenses in closing the deal, but they will very likely raise the quality of your due diligence process. This tends to translate to a better, more successful experience for both parties.
Remember that significant errors and oversights in any part of this process could gravely hurt you and your shareholders after the sale closes. Additionally, subpar due diligence will turn off the serious buyers that you most want to attract.
Avoid that headache by bringing in support, especially if you suspect you’ll need it after reviewing our full checklist.
Virtual Data Rooms: Less Stress, Better Security
In 2022, no due diligence process is off to a good start without a strong data room solution. The troves of sensitive data, specialized permissions, and the need to fluidly provide teams access en masse, all make VDRs (Virtual Data Rooms) a necessity.
Every corporate combination should (and generally does) include a VDR today, but this is doubly true for remote integrations. The security, efficiency, and remote functionality they provide have shifted them from a wise investment to a requirement over the past five years.
SecureDocs virtual data room has helped thousands of companies simplify the due diligence process by making it easy to monitor, restrict, and share documents without sacrificing security. Start a full feature free trial of SecureDocs today.