Due Diligence

Legal matters, business strategy, and life perspectives from the mind of a non-attorney.

 

So you want to sell your business, eh?

Obviously, the reality is somewhere in the middle. Which end of the spectrum does it fall on? Hard data indicates that reality is much closer to the latter.

70% of businesses placed on the market NEVER sell.

That’s 7 out of 10.

If you’re a small business owner, I want you to think about your top 2 competitors. If you all went on the market today, statistically speaking, only one of you is going to sell. The other two would be liquidated. Yikes.

 

Even if you are fortunate enough to receive an initial Letter of Intent, you are not “home-free”.

According to Forbes, nearly 50% of all deals fall apart in the formal due diligence process!

That means, in a TON of cases, the money and mutual interest is there, but it doesn’t get to the finish line because of something that happens in Due Diligence!

 

What is Due Diligence?

Merriam-Webster says, “Research and analysis of a company or organization done in preparation for a business transaction.”

I really like that definition. It’s simple and straightforward. Unfortunately, Due Diligence is anything but simple and straightforward.

 

It’s a HIGHLY complex process that requires a TON of time, for both the buyer and the seller.

 

The process of formal Due Diligence begins when a Letter of Intent is executed. This letter is generally non-binding, and usually discloses a range of possible purchase prices.

Next, the buyer will likely sign a non-compete and non-disclosure agreement in exchange for the ability to review the seller’s sensitive documents.

Then, all H*** breaks loose.

A well-educated and experienced buyer will look for every conceivable way to “re-negotiate” terms of the original offer. They analyze and scrutinize until they are satisfied that every stone has been overturned. This includes:

  1. Financial Documents
  2. Organizational Documents
  3. Physical Assets
  4. Technology
  5. Intellectual Property
  6. Customers
  7. Strategic Direction
  8. Contracts
  9. Employee Benefits
  10. General Employee Issues
  11. Key Personnel
  12. Litigation
  13. Environmental Issues
  14. Tax Matters
  15. Insurance Matters
  16. Professional Affiliations
  17. Press Releases

These are just a handful of the topic areas typically covered. Have you ever seen an actual Due-Diligence Checklist? A short checklist is 10 pages long. An extensive checklist can push 25 pages without blinking an eye.

What if you can’t find some of the information requested?

…Or it takes you a few weeks to deliver the information because you’re ‘busy’?

…Or you feel uncomfortable disclosing the information?

As the selling party, that’s all your prerogative. I can promise you, though, it doesn’t paint you in a good light.

 

Buyers generally are given 30 to 60 days, just to review the material once it has been received. At that point, all parties may come back to the negotiation table to try and close the deal.

Start to finish, most deals take at least 6 months to close. Many can take significantly longer. Can you imagine the pain of having a deal fall apart in the final stages?!

If the Due-Diligence process equates to actual wartime preparation (in terms of the planning and strategy required to do it well), most business owners act like they are preparing for a casual water gun fight in their backyard. Woefully unprepared.

 

Practice Makes Perfect

Wouldn’t it be nice if you could get a practice run at Due Diligence? You know, get bruised up a little bit – maybe a few years in advance of your exit. That way, you could figure out the things that you need to correct while you still have time on your side. Plus, you wouldn’t be blindsided by anything when Due Diligence happens for real, because you’ve got experience on your side. No surprises.

Man… That would be perfect…

 

By Exit Planning with Epiphany Law, you can do just that.

Your first step is completing a State of Readiness assessment, which offers an unbiased opinion on the preparedness of YOUR COMPANY for a transition / sale. If you’re ready, great! Keep up the good work until it’s time to hit the ‘eject’ button. If you aren’t, we will recommend ‘next steps’ to get you where you need to be.

 

Give us a call or shoot me an email if you have more specific questions!

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