Don’t Be Tricked During Due Diligence

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The investigation or “due diligence” period is a very intimate experience for business owners because a stranger will be deliberately trying to find the flaws in the company you spent your life building. Yet, through all this poking and prodding, you will have to smile and present a united front.

Most potential buyers will ask questions like:

  • When does your lease expire and what are the terms?
  • Do you have consistent, signed, up-to-date contracts with your customers and employees?
  • Are your ideas, products and processes protected by patent or trademark?
  • What kind of technology do you use, and are your software licenses up to date?
  • What are the loan covenants on your credit agreements?
  • How are your receivables? Do you have any late payers or deadbeat customers?
  • Does your business require a license to operate, and if so, is your paperwork in order?
  • Do you have any litigation pending?

These are examples of the objective questions – the ones you expect. This stranger will be digging into the subjective sense of your business. Such as whether you are the fundamental reason for the success of your business. How and by whom decisions are made and the potential growth opportunities. In other words, how dependent the business is on you and/or the other exiting members. As you can imagine this is not information you will freely given up, and thus, the potential buyer must gather by reading in-between the lines.

Often the potential buyer will use a number of tricks of the trade, here are four most common tricks you should be aware of:

The 1st is simple: Last minute meeting time change. By asking to make a last-minute change to your meeting time, the potential buyer can get an understanding of your involvement in the daily operations. If you can’t accommodate the change request, the potential buyer may probe to find out why and try to determine what part of the business is so dependent on you that you have to be there.

2nd: Compare the 5 year plan for Business. The potential buyer may ask you to explain where you see the business in 5 years or where you see growth in the business. Be prepared for this question! More importantly, ensure that your key managers and employees are all on the same page. In the event, the key managers answer inconsistently, it will lead the potential buyer to believe the driver and visionary for the business is you!

3rd: Speaking with Customers about “WHY” they do business with you. A potential buyer will likely ask to talk to some of your customers. It is expected that you will choose you long standing most loyal customer who will say good things.  This is where is gets tricky: when the customers are asked a question like ‘Why do you do business with these guys?’, you do not want your customer to respond explaining how much they like you personally because its tells the potential buyer the loyalties lie with you. Rather, you prefer your customers answer by describing the benefits of your product, service or company in general.

4th: “Pre-Shopping”. Potential buyers often conduct their first bit of research before you even know it! By posing as a customer, visiting your website, or coming into your company to understand what it feels like to be one of your customers. Once you have put the business on the market, whether public or otherwise, make sure that your team keeps all new companies and customers experiences consistent and organized. You should avoid personally getting involved in serving brand new customers. Potential Buyers will be concerned that business will dry up when you leave if you are the key to sealing the deals.

 

*This blog article is for informational purposes only.  It does not create an attorney-client relationship and is not intended to be regarded as legal advice.   

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