Due Diligence Is Not A Proctoloy Exam

Although it might feel like it when your in the middle of going through it.

Due diligence is a necessary evil if you want to sell your business. This is where the buyer gets to examine your business from its toe nails to the very top of its head.

I can tell you that when I was the one being put through a due diligence exam, I thought I would kill the company that was trying to buy me. In fact, the first time I went through this process I ended up taking my business off the market.

There is a stated reason for due diligence.

The stated reason your company is going to have to go through a due diligence exam is because the buyer needs to verify that what you told them is true. They’re going to want to see literally everything that your business does and find out if what you said can be verified.

When you first start the process there’s a good chance you’ll say, “Whoa, I’m not going to provide all of this information.” If that’s your final answer, then there’s a good chance you won’t get around to selling your business.

Instead, why don’t you just hold your nose and get on with it. It really is the only way you’re going to get your business sold.

Why due diligence seems so invasive.

I have this secret feeling that the real reason due diligence happens is because the buyer uses the opportunity to lower the price that was negotiated before your letter of intent was signed. This is the document that says what the buyer agrees to pay for your business and the purchase terms.

The best way for you to combat this issue is to be truthful and open with your buyer before you get a letter of intent. That way when the buyer starts to try to re-negotiate your deal, you can say, “That was already disclosed and you accepted it as is.”

If you aren’t fully open and disclose the scary things in your business, you’re asking to take a haircut in the form of a reduced price or different terms at closing. You can hope your problems aren’t found…. but, is it worth taking the risk?

Why you need someone taking you through the process.

Even under the best of circumstances, due diligence is a stressful process. You should have someone who’s impartial working with you to get through the process. This person should have no conflict of interest when they help you.

I like having an independent advisor helping you in this process. This person doesn’t have a conflict of interest around whether you sell your business or not. All of the other players will either want you to sell (your investment banker) or won’t want you to sell (your lawyer or CPA). In both cases you might not be getting the best advice about what to do.

10 things you need to do to protect yourself.

Here are 10 things I wished I knew when I went through my due diligence process:

• The buyer will use due diligence to try to reduce the price they pay for your business.
• You can protect yourself by disclosing everything before due diligence starts.
• Make sure things that could be brought up in due diligence are covered in the letter of intent. This prevents issues in your business from being re-litigated during due diligence.
• Know what is truly proprietary information and protect it.
• Even if you have a signed confidentiality agreement act as if everything you tell your buyer will become public information. (see point above)
• Key account information has to be provided in a way that won’t tell the buyer who and where your key accounts are.
• Remember to breath. An experienced buyer will use this process to bully and intimidate you to get a better deal.
• If the buyer really wants your business, they’ll overlook some things, but not everything in due diligence.
• This is an adversarial process. Just get over it.
• You are allowed to do due diligence on your buyer, especially if provide an earn out or hold paper in the deal.

Like all unpleasant things, this will also pass.

If you’re really committed to selling your business, the due diligence process will eventually end. If possible, put as much space between you and the buyer who’s doing due diligence.

When you have an intermediary who’s working on your behalf they can either say they have to check with you or they don’t know. The good news about this, they’ll be telling the truth.

If you really want to sell your business, you’re just going to have to get through the process.

This is the really important lesson. You can be sure that your buyer is not going to waive having your company go through a due diligence process. After all, they do have the right to examine everything about your business.

A business is hard to value and hard to figure out if it’s a good thing to buy. Due diligence is part of the process and one that has to be successfully navigated…..that is if you really want to sell your business.

If you’ve been though a due diligence process, why don’t you add your comment below.

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