What’s Involved In Due Diligence When I Sell My Business?
August 2, 2008
August, 2008 Op-Ed Article
What’s Involved In Due Diligence When I Sell My Business?
Due diligence is a critical phase in the sale of any business when the buyer and his/her trusted advisors perform several kinds of audits to: (1) Confirm everything the seller has represented about the business is true and (2) Make certain that there are no hidden surprises. When the buyer’s due diligence uncovers serious discrepancies/ deficiencies, it is not uncommon for the buyer to require a significant reduction in the purchase price and/or a significant tightening of the terms in order to still close the deal. Frequently, the deal may fall apart altogether if the deficiency is serious enough.
Due diligence usually begins after the parties have agreed in principal to the price and general terms of a deal, and usually requires 30 to 90 days, depending upon the complexity of the business. It has at least four phases: Legal, Financial, Environmental and Operational, which typically proceed in parallel.
The buyer’s attorney usually leads the legal phase, which seeks to confirm that the business is now and will continue to be properly licensed, that there are no lawsuits pending against the company, and there are no problems in transferring the company’s contracts with its existing customers and vendors.
The buyer’s CPA/ accounting firm will usually lead the financial phase, which seeks to confirm that the business books and records accurately represent the current financial condition of the company. The buyer’s bank will also have their own list of questions regarding the business’ financial condition, which must be satisfied before they will approve the acquisition loan. During this phase, the bank will also require independent appraisals of the business’ assets. If these include real estate, either owned or leased, the bank will no doubt require an environmental phase one audit, depending upon the nature of the business.
Operational due diligence is usually conducted by the buyer’s own management team.
During due diligence, the seller is likely to feel like the company – and perhaps even the seller personally — is being put under a high-powered magnifying class, which can be pretty comfortable even when it goes well. An experienced M&A advisor can be of great assistance during this phase by coordinating and simplifying the information requests from these various sources. In some cases, we can identify those requests that aren’t relevant or material for this business, or by suggesting some alternate ways to get the buyer the basic information he/she requires from readily available sources/ reports, rather that initiating a time consuming special study.
If you know of a business owner who’s thinking of selling or buying a business and who might benefit from a free consultation with us, have them contact me, or any of the M&A professionals at www.bradwaygroup.com
The Bradway Group
813.299.7862 Direct
ertel@bradwaygroup.com
© 2008, J. Michael Ertel, PA
When It Is The Right Time To Sell Your Business, Will Your Business Be Ready?
July 1, 2008
| July, 2008 Op-Ed Article |
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When It Is The Right Time To Sell Your Business, Will Your Business Be Ready? It’s been estimated that the owner of a typical small- to medium-sized business has up to 90% of their personal net worth tied to their business. Their retirement plan is simple: Sell the business for a whole lot of money and live off the proceeds. Problems can arise for a variety of reasons when the business owner is ready to retire and the business isn’t ready to sell. In many cases, the business owner has underestimated the amount of time it will take to prepare the business for sale, and/or the length of time it will take to conduct an effective marketing campaign to find the right buyer and negotiate the best price and terms and actually get the deal closed. In other cases, the owner is simply unaware of the steps he/she might take to maximize the attractiveness of the business, and ultimately its market value. In the current economic climate, the buyers are also getting pickier and the successful seller may need to spend even more time and effort making their business saleable. Experts suggest that business owners begin as much as 3 to 5 years – and in some cases longer – prior to their ideal “last day” in the business. While this might seem excessive, there are several good reasons for such a lengthy planning and preparation period. First, more sophisticated buyers will insist upon reviewing 3 – 5 years of historical financial statements, preferably reviewed or at least compiled by an outside accounting firm. Larger & more sophisticated buyers may require audited financial statements. If your business is not doing this now, it can obviously take several years to build up this well-documented financial history. Furthermore, a business owner would be wise to anticipate some of the common issues that often show up in due diligence that will lead the buyer to either reduce their offer, or walk away from the deal altogether, and implement changes to eliminate or at least minimize them. Some common concerns are: Excess Customer Concentration; Lack of Management; Deep Threat of Technical Obsolescence, and Overdependence Upon the Seller. Additionally, a business owner might choose to implement several changes to improve the proven cash flow of his/her business, since this is so important in determining the ultimate market value of the business, and these can take time to implement and bear fruit. Likewise, the owner of a small- to mid-sized business should allow about 1 year and in some cases substantially longer to conduct an effective marketing campaign to find the right buyer and negotiate the best price and terms, and actually get the deal closed. Finally, many savvy buyers will want the seller to stay on in a management/consulting role for six to twelve months, and in some cases much longer. If you know of a business owner who’s thinking of selling or buying a business and who might benefit from a free consultation with us, have them contact me, or any of the M&A professionals at www.bradwaygroup.com © 2008, J. Michael Ertel, PA |
