Expert Advice on Preparing for Due Diligence in Middle-Market M&A
Dec 15, 2023
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Learn about the importance of preparing for due diligence in middle-market M&A deals. Discover the differences in how various buyers handle due diligence, the key documents needed, and the need for speed. Understand the emotional struggles faced by sellers during this high-stakes process and the importance of mental well-being. Gain insights on essential steps for sellers to navigate the due diligence stage effectively.
Due diligence is crucial for validating assumptions and ensuring a successful transaction.
Preparing for due diligence requires emotional preparedness, time commitment, and delegation of responsibilities to streamline the process.
Deep dives
Understanding the Role of Due Diligence in the Sale Process
Due diligence is a critical stage in the sale process, where buyers investigate theories concerning the value of the company by asking in-depth questions about various aspects such as operational, financial, tax, and insurance nuances. It serves as the last step before finalizing the deal and is triggered by signing a non-binding Letter of Intent (LOI). Due diligence is essential for validating assumptions and ensuring a successful transaction.
Challenges and Preparation for Due Diligence
Due diligence can be complex, with a significant number of deals facing challenges during this stage. Sellers should be well-prepared by organizing their company's documents, financial statements, customer lists, team structures, and other relevant information in advance. Anticipating and providing around half of the requested documents before the buyer raises them can facilitate a smoother due diligence process.
Emotional and Time-Consuming Nature of Due Diligence
Preparing for due diligence is not merely a technical task but also an emotionally taxing process, akin to significant life events like childbirth or sending a child to college. Sellers often find due diligence to be the most stressful experience, requiring extensive time commitment, averaging around 20 hours per week. Emotional preparedness and support are crucial for navigating the challenges and stress associated with due diligence.
Preparation Strategies for Sellers
To ease the due diligence process, sellers are advised to delegate responsibilities to their leadership team, allowing the business to function efficiently during the sale. Taking a trial vacation to observe the company's operations without direct involvement can reveal areas requiring attention. Implementing a Quality of Earnings (QOE) analysis and crafting a clear selling storyline are recommended steps to enhance preparedness for due diligence and post-sale transitions.
The due diligence process is stressful and has high stakes for both sides of any acquisition. Jonathan Wilson returns to M&A Talk to highlight the importance of preparing for the due diligence stage and what to expect during this period of a business sale. He discusses the differences between how various types of buyers handle due diligence, gives an overview of what documents are needed, what to look out for, the need for speed, and how to prepare for due diligence from the very beginning of the sale process.