{"id":1476,"date":"2020-06-22T22:02:57","date_gmt":"2020-06-22T22:02:57","guid":{"rendered":"https:\/\/www.b2bcfo.com\/john-noyd\/?page_id=1476"},"modified":"2021-09-14T22:47:20","modified_gmt":"2021-09-14T22:47:20","slug":"due-diligence","status":"publish","type":"page","link":"https:\/\/www.b2bcfo.com\/john-noyd\/due-diligence\/","title":{"rendered":"Due Diligence"},"content":{"rendered":"\r\n

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Selling a Privately Held Company<\/h2>\r\n

Most owners of privately held companies eventually want to sell or transfer their ownership interests sometime in the future. This article is an attempt to help owners understand one of the more frustrating processes of selling a business, which is called \u201cdue diligence.\u201d<\/p>\r\n

What is Due Diligence?<\/h2>\r\n

\u201cFew buyers will purchase a business without conducting an extensive investigation, generally called due diligence. The key to surviving the buyer\u2019s due diligence is understanding what areas of your business the buyer is likely to investigate and being prepared for that investigation.\u201d<\/p>\r\n

\u201cThe purpose of due diligence on the part of the buyer is to validate the information you\u2019ve provided to a point where the buyer feels reasonably comfortable and understands the risks involved in the purchase. In virtually every transaction, the buyer\u2019s offer is contingent upon the results of the due diligence process.\u201d (The Exit Strategy Handbook, p. 70<\/em>.)<\/p>\r\n

Due diligence is very time consuming and often the highest risk component of the business sales process. Careful planning and execution of this process is critical to a sales transaction.<\/p>\r\n

Due Diligence Preparation for the Data Room<\/h2>\r\n

The seller\u2019s objectives are to validate the proposed sale price, to defend the EBITDA price multiple, and to reduce the chance of surprises to the prospective buyer.\u00a0 All documents from the seller are to be placed in a \u201cData Room,\u201d which is often a virtual location. (See Chapter Seven of The Exit Strategy Handbook<\/em> to learn about important Data Room topics, such as security of the room, rules to access the room by potential buyers, etc.)<\/p>\r\n

\u201cDepending upon the size and complexity of the company being sold, the Data Room may contain thousands or even hundreds of thousands of documents, including all relevant client, supplier, employee, financing, and other contracts, as well as title documents, board minutes and so on. Indeed, any document that could have an impact on the value of the company should be in the Data Room.\u201d<\/p>\r\n

\u201cInto this room go copies of every relevant document needed to review the deal. More documents are pulled in by the barrelful during the process. These include primary customer contracts, primary supply contracts, leases, lawsuits, articles of incorporation, insurance documents, 401K plans, all audits for the past (several) years, primary management reports, employment contracts, and recent industry analyses. This room becomes the center of the deal, with auditors, lawyers, investment partners, and others buzzing like bees around a hive.\u201d (The Exit Strategy Handbook<\/em>, p. 80.)<\/p>\r\n

Results from Due Diligence Planning<\/h2>\r\n

The result of a carefully executed seller due diligence process is the possible validation by the prospective buyer of the proposed sale price, verification of seller assumptions, identification of potential risks and discovery of opportunities to the enhance value to the buyer.<\/p>\r\n

Control of the Data Room<\/h2>\r\n

Maintaining control of the prospective buyer\u2019s review process by the seller\u2019s representatives is critical to a successful sale process. It\u2019s essential that the seller\u2019s Investment Banker (or M&A firm), attorneys and other professionals thoroughly review the information to be looked at by prospective buyers. These professionals should have the expertise to keep the process moving and to handle any issues that may possibly derail the sale of the business.\u00a0 Below are examples of key focus areas to follow by those who maintain the information in the Data Room.<\/p>\r\n

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  1. Information in the Data Room should fully support any previous representations by the seller to the prospective buyer.<\/li>\r\n
  2. Documentation of any adjustments to remove revenue and\/or expenses that will not be carried forward to the buyer. (i.e., Adjusted EBITDA.)<\/li>\r\n
  3. Assumptions used in forecasts should be well documented and reconciled to anything previously represented by the seller to the prospective buyer.<\/li>\r\n
  4. After consultation with professionals, the prospective buyer should be told by the seller if company has significant operational setbacks. Disclosure should be made whether or not these setbacks are totally resolved.<\/li>\r\n
  5. Proactivity and documentation are necessary for current accounting procedures, account reconciliations and operating policies.<\/li>\r\n
  6. Accuracy on the company\u2019s balance sheet is critical. All material amounts on the balance sheet should be reconciled to proper documentation. Specific focus on possible unrecorded liabilities is recommended. Unrecorded liabilities by the seller may cause the prospective buyer to either decrease the purchase price or walk away from the deal.<\/li>\r\n<\/ol>\r\n

    Additional Assistance with Due Diligence<\/h2>\r\n

    Our firm owns and has a patent on due diligence software that may be licensed by visiting www.b2bcfo.com\/store<\/a><\/p>\r\n

    My Expertise<\/h2>\r\n

    Please see my \u201cAbout\u201d page to read my qualifications to be an expert on this subject.<\/p>\r\n

    Get Started With <\/h2>\r\n

    Get Your own complimentary* Discovery Analysis\u2122 from B2B CFO\u00ae<\/sup><\/p>\r\n