Selling a business? Due diligence will help you get the best deal

Doing a deal
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Clive Hyman
Hyman Capital Services
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Due diligence is a tool to manage a deal process and often gets ignored while people focus on the “excitement” of the deal.

When you want to sell your company, it is extremely important to commit fully to doing due diligence, making sure that your company is properly valued, and that your buyers are an appropriate fit. 

Recently, I supported owners wishing to sell their company and was reminded not only of the importance of due diligence but that intuition and feeling also play a part. Business acumen has a strong element of experience-based-intuition.

Sadly, it can be far too easy for companies to rely on hope and potential.  What it is far more important is that you present a comprehensive, detailed and accurate reporting of your company to avoid any future challenges. When selling a business you need to dedicate extensive time and energy to creating a compelling, authentic case for your business that is rooted in facts, figures and legislation. 

Here are the best ways to prepare for what can be a rigorous and exhausting selling process. 

Creating a compelling case

You need a thorough understanding of your proposition – how is your company formed and how can you translate that into a compelling case for a potential investor? Be ready to explain the intricacies of your business as well as any outsourced support, common assets or family links. 

A sensible investor will want to meet with the senior team to get a comprehensive understanding of the business. Public financial data simply cannot replace a conversation. Prepare for this by making sure that your entire team is fully briefed and on the same page. 

Valuing your business

Any serious investors will make an offer subject to due diligence or they could be putting their own portfolio at risk. Make sure you have already got the ball rolling on this process, even before you approach buyers. 

For example, you can talk to banks to get an objective viewpoint about the saleability (and scalability) of your business. Having an external pair of eyes look at your business can help you gain a robust and comprehensive understanding. 

In this highly accelerated world, it is all too common for start-ups, particularly in the tech space, to assume profit before they have made a cent.

When trying to sell a start-up be realistic about your proposition and how much profit you anticipate you can make in the next few years.  Recent history shows many bankers and financiers losing capital after making poor judgments on the viability of loss-making companies.

This means that many will view buying start-ups as an extremely risky business move. It may be worth waiting until your business has a reliable consumer base and a robust business forecast, at which stage you may find investors far more responsive and positive. 

Strength of management

An investor will want to understand your managers’ skills and aspirations. Make sure you have a set of up-to-date professional CVs ready.  Buyers will also be interested in the reputation of the members of the management team so be prepared for the buyers asking their professional contacts for their opinions. 

Make sure that you are fully satisfied that your managers are the best possible representation of your business. Have they proved to be an asset?  How can you best showcase their abilities? Have prepared answers that best demonstrate their capacity and how they contribute to the sales, marketing and prospecting business process. 

Memoranda of understanding and SPAs

Memoranda of understanding, also known as heads of agreement, are tremendously important. The document sets out the basic principles for a deal and should be in place as soon as possible. 

Any business deal can only go through with a Sale and Purchase Agreement (“SPA”) which formalises the results of the commercial and price negotiations. It must offer a sufficient way of dealing with any adjustments in price if accounting or other issues emerge.

It is extremely common for businesses accidentally to present an incorrect view. Often due simply to human error, this is by no means the death of a deal. However, it does highlight the need for a mechanism to handle such eventualities. 

Results, forecasts and budgets

Any investor will want to look at: results to date, the cost base and the link between the business forecast and budget. Make sure you have these prepared and ready.

This will allow the investors to gain a comprehensive understanding of your business trajectory, as well as how an investment might be used to drive the business forward. 

I find that businesses wishing to sell often set extremely high targets in the hope it will spur employees to achieve what are simply unobtainable results. Investors will be looking for teams which meet their targets – so set realistic expectations and then work to exceed them. 

You will need to have a detailed forecast that takes into account the plans for the business post deal. This will allow the investor to assess the financing requirements.

Make sure your forecast is rooted in previous success rates or it may be that you come across as either conservative or fantastical. Also, take the time to create a detailed and intricate forecast and budget. These are extremely important indicators for any investor and can make or break a sale. 

Earnings Before Interest, Tax, Depreciation, and Amortisation

An investor will want to understand your EBITDA as it offers the true representation of recurring profitability behind the myriad figures they will be presented with during a deal. Make sure you have looked into this, as a business, and are able to present it in the context of the drivers of the business as well as the progression of the profit. 

Prioritise personal conversation

Communication in any business deal is an often neglected, but extremely important factor. A lack of communication can lead to missed opportunities as well as the breakdown of potentially fruitful deals.  I have seen a number of deals fall through simply because people didn’t pick up the phone or make face to face meetings. There is always a place for emails, but don’t forget the importance of looking someone in the eye when having a conversation. 

Finally, always focus on building relationships. In the cut and thrust of deal-making, an element of ruthlessness can emerge.  Occasionally, people can anger you. Remember to keep your cool!  A moment of irritability can tarnish your reputation. Ideally, you want to sell your business to people who will remain valuable contacts.
 

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