Are you ready for the technical demands of due diligence?

By Michael Sonego - January 14, 2019

If you’re selling your business, one of the most important aspects to maximise value is to ensure that the business’ performance, and what you’ve told prospective buyers, can withstand a detailed due diligence process.

Research by Pitcher Partners and Mergermarket1 identified that one in four companies found their recent acquisition took longer than expected. In particular, internal hurdles such as a lack of resources and difficulty in sourcing information made the process complex. Businesses should think at least 12 months to two years ahead of a sale, in order to get the business to a point where it is ready.

Financial due diligence typically gets the most attention as it is paramount to supporting the valuation and business case.

Buyers will pay more when they have a clear picture of your business, and can see where and how they can add value to the acquisition.

Due diligence is more than ensuring your numbers are correct. Amongst other elements, it requires legal, tax and compliance considerations, intellectual property audits and valuation. Businesses need to prepare holistically for due diligence, to structure a successful deal and mitigate deal risk.  

It shouldn’t be underestimated how much a buyer will want to learn if they are to pay handsomely for your business. While a buyers’ advisors pore over your business and the financials, tax and legal compliance, operations, human resources, IT and relationships with customers, you need to keep trading your business. In advance of the due diligence process, ensure you have adequate resources to maintain your ‘business as usual’ performance and continue to meet budget, whilst answering questions and explaining the business to advisors. 

Here are some tips on being ready when buyers knock at your door:

1. What's driving performance?

​Its critical to demonstrate what’s driving revenue and earnings in your business, whether your business is growing, steady or declining, as it allows buyers to understand the reasons behind the trends, make their own assessments about future performance and their ability to influence that performance.  In making this assessment, buyers will seek to understand:

  • Where and how revenue and gross profit are being derived and which way they are trending. They'll also want to understand what controls you have in place (i.e. customer and supplier contracts and relationships).
  • Risks relating to losing revenue and profit from customer concentration.
  • How variable or fixed overhead costs are, and the ability to flex them if there is a shift (positive or negative) in the business.
  • External market factors such as industry trends, competition, foreign exchange or product importation and trade restrictions

2. What investment is required to run your business?

All businesses require some level of investment – it might be as little as working capital to operate, or a need to invest significantly in capital expenditure to grow (a new site, new vehicle or new machine). There may also be seasonal requirements to consider.

In most businesses, growth requires investment in working capital. Understanding future investment needs is critical for a purchaser to ensure they have appropriate debt and equity in the business to fund growth.

3. Is your business scaleable?

Unless the buyer is simply looking to maintain the status quo, new owners will be keen to understand how much the business can grow before they need to invest further and before market concentration becomes a risk.

4. Has your business received sufficient investment in the past?

A lack of past investment could pose an issue when selling a business. A buyer will seek to understand past investment as this may mean they need to fund new equipment or growth shortly after taking over. Whilst this is to ensure they have adequate funding, they’ll likely also seek to reduce the purchase price by an appropriate amount.

Are you ready for due diligence? Get in touch with your Pitcher Partners’ expert for advice.

Download a copy of Dealmakers: Mid-market M&A in Australia 2018 for first-hand insights into Australia’s rapidly evolving mid-market environment.

1Pitcher Partners and Mergermarket, Dealmakers: Mid-market M&A in Australia 2018.

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