Quote – “Nobody expects The Spanish Inquisition!” – Cardinal Ximenez, Monty Python Series 2, Episode 2
For those who have heard from a friend or colleague who successfully sold their business, certain details surrounding the process itself sometimes get omitted. The endless series of questions, the mountains of data and the seemingly infinite number of meetings seem to all be a blurred memory when one hears that another “got the deal done.” Now, unless this is a very small transaction, few buyers these days, financial sponsors or strategics, write a check of any size without performing the dreaded due diligence. And, much like this humorous sketch from Monty Python, the requests for information seem to always include one or two additional items that were originally omitted. Trust me, there is a strong parallel between this process and the Spanish Inquisition.
Having said that, there are a series of steps one can take to help ensure a successful transaction. In fact, we have a registered process called TransactReady® which we use to guide you through the most critical steps to help ensure a transaction is consummated. For purposes of this blog, I would like to focus on just a few of the hard-core items that should be your priority as you enter the diligence phase:
- First and foremost, one should “know thyself.” Work under the assumption that any warts you have will be found out, so it is best to perform your own SWOT (Strengths, Weaknesses, Opportunities, Threats) analysis and understand how you will address any issues which come up. Potential buyers appreciate the honesty and knowledge you have of your business when you volunteer this information versus having to address it in a findings meeting.
- Expect requests for more information than you may have provided to anyone before – probably by a factor of 10. Set up a Virtual Data Room and work with your professional team to monitor this process.
- Perform your own Quality of Earnings calculation. No, this is not a test to determine if your dollar of economic performance is better than any others but an assessment of the items for which earnings should be adjusted as they may be non recurring or not required for the business to sustain itself.
- Investors buy growth, so do not try to somehow capitalize on all future growth in the business. This may seem counterintuitive as most believe growth means higher earnings which generate more EBITDA and thus a higher price. However, if an investor sees all of the growth sapped out a target, they might lose interest.
- Finally, a business being sold should be an ongoing an entity. New products should be in the pipeline and your team should be ready to manage increasing growth. Buyers have less of an interest in a business that appears to have reached its twilight.
Remember, while you may think a sale is the end of the line for your company, the buyer should see it as an opportunity to take what you have developed and bring it to the next level. Ongoing viability commands a good price and helps ensure a transaction gets completed.