Due diligence: An ally in the vendor’s hand

Being able to move quickly – and with assured information – will make any business more attractive. By TOM McKASKILL.

By Tom McKaskill

The best deals are done quickly, where the buyer recognises that they face few risks in the acquisition and where they have confidence that they can realise their acquisition objectives.

The worst deals are those that collapse due to risks uncovered in the vendor business or where the buyer wants compensation for all the investigative work undertaken to uncover risks in the deal.

As the costs increase and as risks are uncovered, the buyer will want to reduce the price to compensate for the additional costs and risks. If the investigative process goes on too long, the mere passage of time might result in the buyer deciding not to consummate the deal. They might have other acquisitions to pursue or simply consider that there might be further risks yet uncovered that would result in an acquisition failure.

While most business brokers will tell the vendor to clean up their company before the sale, they often fail to explain the psychology of the buyer and why such an exercise not only improves the probability of sale but actually can increase the sale value.

We often forget that experienced acquirers have accumulated corporate memory of all the problems they have experienced in the past. They come into the acquisition negotiation assuming that they will have to spend considerable time and effort looking for risks, and then expend money and time cleaning up the business after they buy it.

The buyer’s objective is to put the business in a state where the potential in the business can be exploited, so delays and costs incurred after the acquisition simply delay the time until the acquisition objectives can be achieved.

Any anticipated future revenue and profit that is delayed simply reduces the current value of the business, and thus directly affects what the acquirer is willing to pay for the business.

The objective of the vendor should be to turn this process on its head and create a business that can be readily evaluated and quickly put into a state where the acquirer can exploit its potential. Both these objectives can be considerably advanced if the vendor undertakes a vendor due diligence with the aim of preparing the business for the buyer due diligence investigation.

In essence, what the vendor is doing is undertaking a practice run at a buyer due diligence. The vendor engages the services of accountants and lawyers who are able to carry out a due diligence investigation of the type the target buyer is expected to undertake.

The results of the vendor due diligence are then used to ensure that any problems are uncovered and fixed and the business made ready for the buyer due diligence.

The advantages of such are process are several. You get to find out problems within your own business and can get honest advice on how to fix them. This alone should make your business more efficient and effective.

Then of course you do end up assembling all the information necessary for a buyer due diligence thus greatly decreasing the time and effort you would have to incur during the buyer activity.

This also allows you the luxury of continuing to operate your business without the disruption of the buyer investigation. Of course you will have greatly reduced the time and cost of the buyer due diligence and, hopefully, greatly decreased the risks confronting the buyer. Any unresolved items can be tabled early in the discussion so that the negotiated sale price already reflects known issues.

A well prepared business will be positively received by an experienced acquirer, who in many cases will be willing to pay more for the business because of the absence of problems or because it enables the buyer to move quickly to integrate and exploit the new acquisition.