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Preparation: The Key to a Successful Acquisition

Business Calculations and Meeting

Whether you’re finally decided to sell your business or received an unexpected offer from a potential buyer, you may feel a combination of trepidation and excitement. Successfully selling your company requires you to prepare for the brutal realities of due diligence. Due diligence looks at many aspects of your business—legal, financial, tax, operational, human resources, IT, IP, and more. Here’s what you need to know to prepare.

The First Steps
Due diligence often kicks off with a long list of requests and a short timeline in which to answer them. This is often because of the ticking clock the letter of intent initiates. Most buyers request financial data for this year and the prior two fiscal years. If you see the term TTM (trailing 12 months), it refers to financial records for the 12 month span that ends with the most recent month.

After you provide monthly balances, the buyer may ask for specific schedules, such as those itemizing revenues and expenses. Once all of the requested documents have been supplied, you’ll store them in a virtual data room and proceed to additional due diligence.

On-Site Visits
The buyer will likely schedule one or more tours of your offices. During these visits, they will meet with management to ask questions and learn about daily operations. These meetings may include:

  • an overview of daily operations
  • discussions about customer base, revenue history, and customer concentration
  • a walk through of the trial balance
  • queries about employees and their specific roles
  • questions about accounting methods
  • discussion of pricing trends
  • assessment of liabilities, such as unsigned IP agreements or potential lawsuits
  • a review of employee contracts
  • a physical inspection to assess for problems with the building
  • employee interviews

This process can be grueling and stressful. In most cases, a buyer will focus on your most key employees or managers to gain an understanding of how your business functions. Be sure to prepare them ahead of time, and address any concerns—including dissatisfaction with the acquisition.

Negotiation
At the conclusion of facility visits, the team may request additional documentation. Once they have all the information they need, they will compile a report. This report then becomes a negotiation tool that may affect purchase price or the terms of the purchase agreement. The goal of strong preparation is to ensure that due diligence does not cause the buyer to lower their offering price.

The Perils of Being Unprepared
Being unprepared for due diligence is simply not an option. Buyers do not operate on trust and promises during this microscopic examination. They want to see support for every claim the seller makes. If they don’t see such support, it might as well not exist. Don’t try to rush the process, and don’t allow yourself to become overwhelmed. Doing so can cause you to take your eye off the prize: a lucrative sale at your original asking price. You must prepare for due diligence from day one. And no matter how big your business is, the right expert can make the process more manageable, so don’t try to do it alone.

Posted on behalf of Strategic M&A Advisors

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