If you are considering selling your business in 2012, you need to consider the full sale process, from start to finish. Oftentimes, a business owner has so many other commitments and so little time, that they focus on the front-end of the sale process and work through the later stage of the process when the time comes. What we’re talking about today is why it is critical to consider the complete sale process at the outset and we’ll talk through some common mistakes and potential consequences.
What happens when you accept a purchase offer?
If you own a midsized company and reach the point of accepting a purchase offer, the buyer is then going to hire experts from a range of professional disciplines from financial analysis, tax, benefits, and insurance, to environmental, information technology, as well as various others. They are paid to evaluate your business and conduct thorough due diligence to uncover every potential future issue around your business, as well as study historical transactions and events, and report their findings. This is something to expect in every deal process, but the good news is that you can control this process and limit the time it takes and potential deal issues it may cause. To do this, however, you need to address this early in the process.
Stricter Confidentiality, Better Control and Fewer Errors
You have the opportunity to have your own experts conduct a due diligence analysis in advance of selling your business. You may ask yourself why you’d want to put yourself through that exercise twice and why not wait until it’s necessary for closing. The obvious answer is that you’ll be better prepared after you’ve been through the dress rehearsal behind closed doors. Another reason is that many deals fail to get to the finish line, because the due diligence process was ignored until later on.
If your advisors plan the process and conduct preliminary diligence internally in advance, it puts you in control, allows you to better plan the disclosure process and determine what needs to be disclosed and when. It also helps to determine who the best prospective buyers would be and better plan your unique sale process that is appropriate for your business. There is no boilerplate process, no roadmap that works for every deal.
Your best option is to conduct in-depth analysis of your business, well in advance of a sale, by an independent due diligence team (ideally the investment bank you hire would have in-house staff and expertise.)
Once your advisors have processed this information, you’re in a position to conduct a Gap Analysis, which consists of i) listing data and facts of the present business situation (“what is”), and ii) cross referencing with data and facts required to get to closing (“what should be for the deal closing”) when the business is sold, and then iii) detail the gaps that exist and steps required to overcome them in the process of preparing the company for sale. Your goal is for your advisors to identify any areas that could have an impact on the purchase price or the closing process and address those issues in advance of starting the sale process.
The process is designed to analyze the existing business before trying to build a bridge to an undefined next step in the sale process. Before responding to any inquiries to buy your business, you need to determine exactly what the business currently looks like and what you need to do to get to closing. We call this preliminary due diligence or gap analysis and we wouldn’t attempt to sell a business without undertaking these steps.
Preliminary Due Diligence
This is not something that is easy to compile and typically requires trained analytical skills, strong financial modeling skills and specific acquisition, operations and business due diligence experience. While it may help to have an internal or external accounting staff and even having a history of audited financials, it is not enough. Buyers want to understand the data, trends and events behind the numbers, rather than the numbers themselves.
Whether the company is a privately-held midsized company or a division of a larger company, it is rare that the required level of financial and business data is tracked routinely by the internal or external accounting staff, as they are focused on daily operations and normal financial reporting requirements.
Q: Do I really need to go through this?
A: You need to ask yourself – do you want your advisors to do this for you and discover any surprises or deal issues in private, or do you want the buyer’s due diligence team to conduct the due diligence first and use the results of their diligence as leverage against you in negotiations?
This doesn’t need to be an obstacle to a successful sale process, but it does take planning and clear forethought. In a typical sale process, the business seller may proceed too quickly at the early stages of the process and skip critical steps, only to suffer later on while attempting to get a deal closed. Unfortunately for many sellers, starting this process later on can reduce the purchase price, worsen terms or cause the deal to fall apart altogether, as the buyer may make revisions from their initial, uninformed offer.
Q: How much extra time will this take me?
(Oftentimes, a business owner isn’t even sure if they want to go through with a sale, so are reluctant to spend time up-front until they know a buyer is serious.)
A: So long as you are not in a rush to complete this pre-sale process, it shouldn’t take much of your time and cause little or no disruption to your business. Your advisors don’t need to be on-site to conduct most of this work, so your employees won’t ever be aware of the process. Most of your time will be spent fielding questions from your advisors as they piece everything together and work through their due diligence analysis.
How much will it cost me?
A: Depending on the firm you hire and the scope of the due diligence, it may not cost you anything. A high level due diligence analysis should be included in the fee for selling your business. A professional investment banking firm will want to conduct this analysis on their own time and at their own expense, to increase the likelihood of a successful closing.