Critical Pre-Sale Due Diligence
Due Diligence preparation is often
overlooked, yet is critical to maximizing sale price and ensuring a smooth
transaction. Now more than ever.
Credit markets are tight and despite a
recent rebound, Mergers and Acquisitions activity is still down.
Buyers
are targeting acquisitions - but now with a heightened degree of
scrutiny.
Even if a buyer has plentiful cash available, they are still
likely to leverage the acquisition to increase their percentage
returns.
Leverage brings lenders to the table. Even if lenders are
familiar with the deal, they need to provide detailed support for their
loan.
With the tighter credit environment, tougher reporting requirements
and more stringent data and due diligence requirements, you need to do more
today to ensure a smooth sale process.
A report on your company's
financial results from your accountant or even an independent auditor is not
sufficient.
Your best option is to conduct in-depth analysis of your
Company by an independent due diligence expert to identify areas that will have
a direct impact on the sale price.
Firstly, a buyer needs a thorough
review of your financial accounts and reported financials with supporting
detail, consolidated data as well as data by location, product categories and
other relevant categories for historical and forecasted periods.
They
also need in depth analysis and a report on the quality of earnings, accounting
systems, methodologies and compliance with or departures from GAAP. They need
to see normalized sales, gross margin, and operating expenses, as well as
feedback regarding compliance with debt instruments. They need analysis on AR,
Inventory, CAPEX, working capital, debt and coverage, and
profitability.
Buyers will also require due diligence on liabilities,
operations, tax compliance, legal issues, reputation, industry analysis and
forecasts, competition, customers, suppliers, people, PP&E, integration
risks, environmental, health, internal controls, lease, zoning and permits, in
addition to other business issues.
CLICK HERE for ClearRidge Capital's website
section with expanded information on due diligence requirements.
This is
not something that is easy to compile and typically requires strong financial
modeling skills, trained analytical skills and specific acquisition due
diligence and corporate finance experience.
Whether it is a midsized
privately held company or a single division of a large public company, it is
rare that this data is tracked routinely by the lean accounting staff that is
focused on daily operations and normal reporting needs.
Take Action to Better
Position your Company
This doesn't need to be an obstacle to a
successful sale, but it does take planning and clear forethought. Most sellers
proceed too quickly at the start of the process and skip critical steps, only to
suffer later on while attempting to close the deal.
Unfortunately for
many sellers, starting later in the sale process can reduce the sale price or
cause the deal to fall apart.
Your best solution is to prepare a thorough
due-diligence report before talking to buyers. Proactively offering answers to
their likely information requests not only speeds up the process, but also
inspires confidence in the acquisition opportunity.
If you want to secure
the highest price and the best terms, you are going to need at least two buyers
competing in a confidential auction process.
By providing a due diligence
report in advance, you are saving time and also providing potential buyers and
their lenders with sufficient information for them to submit an LOI (purchase
offer) and close the deal in a timely manner.
Professional preparation
also enhances the image of your company.
Source: Clear Ridge Capital