Gettin’ Ready to Get Ready: Tips for Pre-Sale Due Diligence

Business owners eager to sell their company are wise to take time to assess their business operations before embarking on the sale process.  Prospective buyers want to understand what they are purchasing, and will consequently scrutinize every facet of your business.  This will include financials, corporate documents, personnel records, contracts, patents, licenses, etc.  Taking pains to perform your own due diligence prior to going to market is the best way to avoid headaches during the buyer’s due diligence phase.

Working with your investment banker to perform a thorough review of your company is the first step in preparing to take your company to market. It is a chance to study your business inside and out from the standpoint of a third-party buyer. This phase involves pulling detailed historical data on your company, recasting financial statements and describing the “magic” behind your business. Your investment banker will guide you through this process pointing out any deficiencies that may exist.  Armed with information, you can address potential issues before the buyer’s review.

Below are a few key points to consider ensuring no major issues crop up during the buyer’s due diligence phase. After all, you’ve decided the time is right to sell your business – the last thing you want is to have an unforeseen issue end the transaction.

Defensible Recast EBITDA

Most people approach EBITDA adjustments the same way they approach tax write-offs – aggressive, yet defensible. There is no faster way to lose credibility with a buyer than to be overly aggressive with recasting and inflating your EBITDA. When trust is lost value declines and nobody wins. Working with your accountant or CFO along with your investment banker is key to ensuring your adjusted EBITDA serves your interests, but is also fair and accurate. Keep track of the expenses and make sure you have documentation to support your adjustments. The buyer will insist on seeing the proof that these adjustments are real.

Net Working Capital Adjustments

Normalized net working capital (NWC) is something buyers and sellers have been negotiating for years. Ensuring that there have been no significant declines or leaps in working capital in the months leading up to a transaction makes determination of the NWC easier at closing. This is something your investment banker can assist you with early in the due diligence process. If you have invested too much capital in NWC, you should make the changes to show you can run with lower working capital requirements. The buyer won’t accept lower levels of working capital without proof that the business can be run this way.

Disclose, Disclose, Disclose

The truth will set you free. The due diligence process may identify potential issues such as pending litigation, expiring contracts or other risks. Helping a potential buyer understand the risks and how to mitigate them yields the best chance for success. Hiding potential liabilities erodes trust and will unquestionably kill a deal.

Prepare, Prepare, Prepare

The due diligence process may seem like a daunting and invasive proposition, but working through the issues will position the seller to achieve maximum value.  While nothing is foolproof, hiring and working with a reputable and trusted investment banker gives you the best opportunity to achieve this goal. An investment banker approaches the transaction with his or her goals aligned with yours. Because they are not as entrenched in your business as you, they often see potential due diligence issues that you would never notice.

If you have comments or questions about this article, or would like more information on this subject matter, please contact us.
Michael Rosendahl

Investment Banking
mrosendahl@pcecompanies.com
New York Office

407-621-2100 (main)
201-444-6280 Ext 1 (direct)
407-621-2199 (fax)