No Surprises – Taking the Sting Out of Due Diligence

If there is one thing that buyers of or investors in privately-owned businesses hate more than anything else, it is surprises (and I’m not talking the more than welcome gift-wrapped ones): unsigned contracts, undetected accounting anomalies, undisclosed litigation and any manner of other unwelcome surprises are a surefire way to torpedo a deal.

When a buyer and their advisory team undertake due diligence on a business, the primary objective is to validate the assumptions upon which they have constructed their offer to purchase. Of course there are always exceptions, particularly those unscrupulous buyers who play the game of setting high expectations and then deliberately using due diligence findings to substantially alter a deal (albeit this is more likely to happen when an unwitting business owner has received an unsolicited approach and gets emotionally involved in the process).  Suffice to say that the professional buyer is not looking at due diligence as a way to penalise a vendor, but as a method of assessing underlying risk and recalibrate their expectations.

M&A industry slang for due diligence is “opening the kimono”.  Without taking that analogy any further for fear of offending the sensitive, it does not take a genius to figure out that any surprises discovered during the process, no matter how small, have the potential to raise alarm bells.  The due diligence process allows a buyer’s team to investigate every aspect of your business, from financials (performance, tax compliance, record-keeping, systems, etc.) to commercial concerns.

So, as a future business seller, what should you do to ensure that you remove the element of surprise?  First things first is to understand what buyers look at during a due diligence investigation.  Get some professional advice or tips from your accountant, corporate advisor or broker on what a buyer usually requests, then use this as a checklist.

Make sure your financials match up from source document to statutory returns, your tax obligations are recorded and settled on time and accurately and that you can produce any necessary report at a moment’s notice.

All contracts – with employees, customers and suppliers – should be current, signed and accessible.  You must be able to prove ownership of all Intellectual Property (get some advice from an IP attorney if you need help here), licenses and tangible assets.  Make sure systems and processes are documented, online and otherwise accessible at call.  Keep abreast of any potential litigation threats or fraudulent activity.  Put in place appropriate insurances and ensure compliance with all applicable legislation and regulations.

In short, avoid the possibility of surprises.  If your business stacks up after due diligence in the way the buyer was expecting, you are on the fast road to smooth transition for the business and a happy exit for you.

Andrew Cassin

Partner - Mergers & Acquisitions | Succession Plus

Educated with a Bachelor of Business, Andrew commenced his consulting career in 1993. Since 2003, he has been retained as a consultant by dozens of business principals, completed business sales & capital raisings and facilitated mergers & acquisitions for SME clients.

Industry sectors in which Andrew has valuable experience include professional services, liquor, not for profit, healthcare, and financial services. Andrew’s clients’ requirements have taken him to Hong Kong, Singapore, the USA, and the UK to complement his primary base of knowledge in Australia.

Since graduation, Andrew has undertaken regular additional professional development in disciplines including Corporate Governance, Mergers & Acquisitions, Training, Change Management and Financial Services, and is a Licensed Business Agent in NSW (Lic. No.20036036). He is also the author of On Your Terms: 101 ways to prepare a business for sale or succession.