Why robust due diligence is essential
Holding a dry run of the due diligence process can reduce the risk of such nasty surprises. “If a business has never been subject to a due diligence process, it can be quite demanding,” says Jonathan. “It’s important to make sure information can be cut in all the different ways the due diligence team or the buyers might want it to be cut. It might be that forecasts need to be redone in a more sophisticated manner. It might be that you need to provide evidence that problems can be dealt with or won’t crystallise.”
One issue that can come to light is over-inflated forecasts. Jonathan describes this as a “cardinal sin” of the sales process and urges sellers to be realistic in their projections. If trading begins trending downwards compared to forecasts, buyers will lose confidence and may reduce their offer price or pull out entirely.
There are several bread-and-butter basics you need to get right as you prepare for exit, among them a full understanding of the contract you’re signing and its implications. Of course, you must put the right team in place for the transition. That includes figuring out how to support your finance director and other key senior people so that they can continue in their “day job” running the business while also driving forward the transaction.
Acquirers want reassurance that the right quality of individuals will remain in place to lead the business, so there must be clarity on who in the senior team will remain in post. Also, if your business has liabilities such as a defined benefit pension scheme, this could be the elephant in the room that scares buyers away. Address this issue clearly, so that it can be factored into the transaction and does not suddenly become a barrier to sale.
If you get all of the above right, yours is much more likely to be a smooth and valuable exit.
- Warm-up the more obvious buyers in advance by engaging with them informally ahead of the process.
- Sustained, carefully managed competitive tension almost always drives higher value than faster execution of the deal.
- A management team explaining its business is among the most valuable tools in a sale process. Make sure they are well prepared to do that.
- Acquirers are paying high prices but it’s important to know when to stop pushing for more and close out a deal.
For more on getting your house in order to complete a successful exit, download our Road to Exit guide or get in touch with us to talk about your own strategy.
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* Centre for Management Buyout Research (CMBOR) at Imperial College Business School. http://www.cityam.com/277497/uk-drove-recovery-european-private-equity-activity-year-uk