Surviving Due Diligence

Before I entered the world of investment banking, I spent most of my career in sales, marketing, and executive positions in the enterprise software space. One event that happened frequently was the product demo. Most ranged from the mediocre to the truly awful. What I learned from those experiences is that the quickest way not to sell a product is to demo it. What a demo is attempting to do in most cases is to validate that what one thinks about a product is true. A demo really isn’t a very good selling tool. What really matters is that a bad demo can be a reason not to buy a product. The opposite isn’t true. A good demo is simply validation, not selling.

The same thing can largely be said for the due diligence efforts that are part of the M&A process. By the time the Letter of Intent (LOI) is signed and you are getting into detailed due diligence, the company on the other side wants to buy your company. They are now looking for items that could cause problems after the transaction is completed. It’s rare that due diligence increases the valuation of the company being acquired. More likely, the valuation gets lowered, new escrows and warranties pop up, or the transaction gets called off all together. Due diligence can be a dangerous time. This is one reason you need the help of a good M&A advisor.

So how do you survive the treacherous ordeal called due diligence?

Start early. The day you start on the M&A journey is the day you start working on due diligence. You are going to be collecting lots of information, documents, and other materials. Chances are some of that info is missing or never existed in the first place. It will take time to find or create what’s missing or to gather what is there.

Be prepared. You will be asked to supply a wide range of information ranging from the Articles of Incorporation when the business started to minutes of the board meetings, audited financials, copies of employment agreements, … You get the idea. If you are a private company and have never had an audit, talk to your accountants about an audit or at least a review. Your M&A advisors should have a comprehensive list of items you will likely need. Work with them to collect and organize the information.

Clean up things. Pending lawsuits, unclear licensing agreements, past due payments are just a few items that potential acquirers do not want to see. If you are a software company and you use open source software in your product, make sure you have the right licenses and understand the provenance of that code. That boat out on the lake listed on the company balance sheet probably really isn’t a company asset and your two kids on the payroll who rarely come into the office need to be dealt with. I wish I were making this stuff up, but these are real examples we’ve seen.

Be honest. If something doesn’t exist or you find issues, lying or trying to cover things up shouldn’t be done. If issues don’t get uncovered in the acquisition process, they may arise after the deal closes and you will pay then. That’s why purchasers ask for escrow periods, warranties, and other guarantees. It’s better to deal with the issues up front.

Look at the situation from the other side. If you were buying a company, what would you want to know? What kinds of risk would you want to assume?

Focus on growing your business. It’s nearly impossible to keep your business growing and to sell it at the same time. Your job as CEO is to keep adding value to the organization so that the acquirer sees that value. M&A deals have become unraveled or valuations slashed because company management took their eyes off the road and hit a speed bump or pothole.

Get the right help. The prior point may be the primary reason to engage a good M&A investment banking advisor. An experienced M&A team can guide you through the steps that need to be taken to prepare the company, find buyers, get through due diligence, and negotiate a deal. Selling your company, including surviving due diligence, is too complex to go it alone.

Need to understand the M&A process more? Like to find out if your company is ready? Contact SiVal Advisors to learn more.