Initial due diligence is a great place to determine whether a deal is worth continuing to explore. Below are a few tips to help get you off to a great start.
Tips For Both Parties:
- Look for good deal partners. If you determine that you don’t trust the other party, or if you determine that they are not going to be a good partner in the process (not responsive, disorganized, incomplete and unclear answers, etc.), strongly consider whether it’s even a deal you want to pursue.
- Make sure you have a clear understanding of your own priorities before you get started so you can focus on the most important aspects first.
Tips for the Seller:
- Have a well-organized and secure data room set up and mostly complete before you need it, or as soon as realistically possible.
- Require each prospective buyer to sign a good NDA before getting access to the Data Room.
- If key items are missing from your data room that you know the buyer will need in order to make a good evaluation of the business, be sure they are aware of what is missing and the timeline on when it will be available. That will help avoid a frustrated buyer, and increase the likelihood you can rely on the buyer’s initial evaluation in continuing to pursue the deal.
- Discuss any particularly sensitive items with your deal team to determine whether any items need to be handled more securely outside of the data room.
- Have your team review at least the key items in the data room to help you spot any important issues.
- Take time to understand what your buyer’s financing plan is, and what their timeline looks like.
- If it’s important for you that the business stay in the community and keep your employees, etc., make sure to ask the buyer about their plans after closing.
Tips for the Buyer:
- Make a list of any key items that might be “deal breakers” or “deal makers” for you, and screen for those first.
- Take the time to understand what parts of the business create the most value for you, and focus your initial analysis there. If the business doesn’t create enough value for you, the legal or tax issues that may be involved won’t matter anyway.
- If you are not the subject matter expert on your deal team, be sure to have one your team to help you interpret what you’re seeing.
- Look out for any warning signs:
- Disorganized data room or no data room (assuming the seller was actively preparing for sale)
- Inconsistent and/or poor quality financial records
- Significant gaps in expected information with no clear explanations
- Overly high customer concentrations
- High turnover for key personnel
- Loss of key customers or suppliers
- Broken relationships among owners
- Overall decline of the business
- Estimate what value will be lost as part of the transfer, especially when it comes to customer and supplier relationships, key team members, the role of the seller’s owners, changes in branding, and difficulty transferring know-how. In many small businesses, the founder or owner is key to many parts of the value of the business, especially those tied to relationships and know-how. If the founder or owner is not going to stay on post-closing, estimate how much value may be lost as a result, and factor that in to your analysis.
These resources are provided for informational purposes only, and are not legal advice. No attorney-client relationship is formed through this page. Please contact us if you’d like to inquire about our services.