What are some current due diligence trends?
With the shift in negotiating power to the buyer, coupled with the continued uncertainty, buyers are increasingly seeking to negotiate deal protection by contractually agreeing to shift the risks associated with uncertainty onto the seller. Buyers are insisting on having protection to claw back portions of the purchase price. Earn-outs, escrows, holdbacks and expanded indemnification are increasingly widespread.
Cost efficiency is also important. Buyers are trying to reduce the cost of due diligence by executing a focused, risk-based due diligence process. If claw backs or other buyer protections can be negotiated, the need for extensive due diligence can be avoided. Buyers can then focus on unmitigated areas of risk.
Companies have slashed investments over the past two years. Acquirers should examine whether a target was able to maintain sufficient investment in the key parts of its business to retain its critical advantage.
Also, companies might look healthier than they actually are. Some have cut costs in areas like research and development or sales and marketing. You need to figure out what initiatives were put in place for the company to return to, or retain, profitable levels during the recession.
More and more sellers are trading in the three-ring binders and physical data rooms for virtual data rooms, where documents can be searched and retrieved online. There are a number of vendors who provide this service at a reasonable cost, and efficiencies are gained on both the buyer and seller side.
What should sellers consider?
Be prepared. Make sure information is clean and easy for the buyer to undergo due diligence. Organization and readiness of documents will lead to a quicker due diligence period and instill confidence in the buyer.
Sell the business before you have to. The worst time to sell a business is when you absolutely have to sell. Buyers will know you are desperate. Take a buyer’s perspective — consider whom the key buyers might be and anticipate their motivators. Articulating that strategic fit will drive better multiples. Review your key client contracts and get them extended for longer periods. A buyer is evaluating your long-term sustainable revenue streams when arriving at a valuation.
Prepare for due diligence before a deal arises. Will you need or desire to have audited financial statements, which could enhance value or lessen the due diligence barrage? Also, hire a consultant two years before you want to sell to help undergo reverse due diligence and uncover and remedy potential issues.
Tom Powers, CPA, is the director of assurance and business advisory services at GBQ Partners LLC. Reach him at (614) 947-5215 or [email protected].