Due diligence is the cornerstone of a business sale.
It’s the period of discovery when a buyer finds out what they’re really buying. It’s something you must be ready for but can so often be the undoing of a deal that looks otherwise sure.
Due diligence: the impact
The danger of the price being knocked down during due diligence is real. But it’s also avoidable.
Start with finding a reputable broker who can help you to prepare. To mitigate against buyers finding areas of value they might deem negotiable, we worked with Melony Holman of Compliance and Training Solutions to compile a list of six characteristics of highly successful due diligence:
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Preparation
It’s important to anticipate as many of the questions you’ll be asked in advance, and have the answers to hand. Being ready allows you to answer a buyer’s questions quickly, honestly and transparently.
The objective of due diligence is to identify any red flags in your business, so you will need to cover financial history and tax, employment contracts and any grievances, client service proposition, contracts, fess and holdings; plus all of the key contracts that underpin your business.
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Honesty
There is no such thing as the perfect business and you may think it’s better to downplay or hide the things you aren’t so proud of in your business practices or history.
But lack of honesty is much more likely to scupper a deal than poor due diligence findings. Most findings can be worked through, trust cannot be rebuilt.
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Thoroughness
If the devil is in the detail. Be prepared to provide not just the basics – two years of new business registry, FCA filings, compliance records – but quite granular detail on individual advisers, client segmentation and particularly any business outliers that may show up in your documentation.
Using technology to keep your detailed records accessible is an excellent way to have answers at your fingertips – and will promote the idea that you have a forward-thinking business for sale.
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Compliance
Buyers like a boring business that runs on vanilla investments for a solid roster of long-term clients. They want to be assured that everything is above board as far as the Financial Conduct Authority, HMRC and the law is concerned. Have the proof that it is, and be prepared to explain where there have been compliance breaches.
Any suggestion that the business has compliance lapses that can’t be adequately explained will jeopardise the deal, erode trust and lead to further probing.
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Cultural transparency
One thing that will certainly interest the buyer is what your team looks like and what that tells them about the culture of your business in terms of employment records. Having a longstanding team around you suggests they like the business culture.
They’ll be keen to get a feeling for the dynamic in the office. Are the team free to ask questions, challenge management decisions and offer improvements? Are the recruitment and induction processes thorough? They’ll want to dig up management and board meeting minutes. All of this can help them to get a broader understanding of the business as a whole.
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Technology first
“Every company is a technology company.” That’s what Gartner’s global head of research said. In 2013. If – a decade later – yours is not, that tells a story about your business.
Investing in back-office technology helps you more easily provide answers to platform and client segmentation questions. It helps with accounting, operational costings and forecasting.
Technology is also a key tool in the due diligence process itself, with an electronic dataroom underpinning all file sharing.
In a nutshell
As you can see, there’s a lot to think about ahead of due diligence and a lot to get ready. Knowing well in advance the sort of timeline you’re thinking of for selling your business should equip you with time to prepare, improve and make your business more sellable (and more valuable).
The greatest preparation you can make for due diligence is not to underestimate how many questions you’ll be asked. You’ll probably still be surprised – but at least you’re less likely to feel overwhelmed. Being ready to answer questions – and answer them with alacrity – is your secret weapon in the dealmaking process.
If you are honest, thorough and organised, you're prepared for due diligence.