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5 Ways to Prepare for Due Diligence

Succession and Exit

5 Ways to Prepare for Due Diligence

By , November 28, 2021
due diligence

“You will find out things about your business that even you didn’t know.”

From experience, the vast majority of business owners have only ever viewed their enterprise through one lens – their own.  They know everything there is to know, all the nuances and vagaries, the shortcuts and secrets.

That is until a buyer comes along.  Experienced acquirers and their advisors, with experience of many prior transactions, are well-versed in the intricacies of the due diligence process and know exactly what they are looking for and how best to find it. They ask questions that have probably never been asked previously and dig deep, often uncomfortably so.

Most vendors have zero M&A experience, putting them immediately at a distinct disadvantage and scrambling to effectively respond as the questions flood in.  Few prepare effectively, and it is this lack of preparation that is often to blame for the failure of a transaction, or the renegotiation of key terms to the disadvantage of the vendor.

Before we look at how best to prepare, we should first consider the purpose of due diligence. A business is a complex asset, with an often vast number of unique moving parts, so buyers need to ensure they are taking on no more than an acceptable level of risk.  Essentially, a buyer makes an offer on the business based on a set of underlying assumptions, which are based on the information provided in the early stages. The primary purpose of due diligence is to validate those assumptions, in which case the purchaser is satisfied that the transaction terms are appropriate.

Due diligence also has a dark side, however, with buyers often expecting to renegotiate terms as a matter of course. Once a vendor has signed a Heads of Agreement and undergone the rigours of due diligence, the emotional, financial and time investment makes it more difficult to contemplate walking away when the inevitable post-DD negotiations commence.

In any event, would-be vendors need to take due diligence preparations seriously and pre-empt as many of the potential issues as possible.  A dry run courtesy of a trusted advisor will put a business under the microscope in a far more congenial environment than a real-life scenario, where every error, omission or surprise is potentially money out of the vendor’s pocket. But for those preferring a more hands-on preparation, consider the following five ideas:

  1. Be objective. Look at your business from a buyer’s perspective and be prepared to pick yourself up on any apparent shortcomings. Disciplined buyers won’t entertain excuses and they don’t like surprises, so it’s a great exercise to jump into their shoes for this purpose.
  2. Centralise your information. Having all documentation and information available in one central repository makes the due diligence process all the smoother. You can manually make copies and create physical files or upload scans and electronic files into a Virtual Data Room (which can even be on a secure drive on the company’s server).
  3. Document everything. Business systems, processes, procedures, position descriptions, rationale for any claimed add-backs, any intercompany arrangements and/or shareholder loans should all be clearly and thoroughly documented for the avoidance of any doubt and future dispute.
  4. Check for signatures. Every single contract – client, supplier and employee – needs to be signed by both parties and should be current.  Outdated or unauthorised contracts are essentially worthless when it comes to due diligence, particularly if they are to be novated to new ownership.
  5. Ensure proof of ownership. If you don’t own it, you can’t sell it. Check trading/business names, domain names, software licenses, equipment leases and other assets to ensure that they are owned by a person or company that will be party to the sale of business contract.

This is in no way a comprehensive list, of course, merely some suggestions to pre-empt some of the more common due diligence failures. Forewarned is forearmed, so take action early to ensure that you are not starting behind the eight-ball and leaving yourself open to renegotiations, which will not be in your favour.

Andrew Cassin

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.

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