Here are five takeaways to think about if you are considering selling your business (or buying one from someone else).
We have been going through due diligence with an investor with whom we signed an LOI (letter of intent) to purchase a controlling interest in one of our companies. The process has been more intense than usual because the buyer is a large private equity fund, so they have major law firms and due diligence experts pouring over every bit of every document and transaction in the target business.
Buyer due diligence in larger transactions usually comprises three different types, 1) Financial Due Diligence or “FDD” (the numbers), Commercial Due Diligence or “CDD” (everything else that isn’t the numbers and isn’t legal due diligence), and 3) Legal Due Diligence or “LDD” (all your contracts and agreements and such).
So… if you plan to sell your business at some point, plan on three or four months of deep probing as the buyer’s due diligence teams do their thing (I think we had 39 people on one of the DD calls), and plan on answering the same questions 7 to 9 times as you through the process. Additionally, consider these five takeaways from the deal we are currently working on…
Takeaway #1: Selling a company takes a whole lot of time! Before you sign an LOI for a sale, plan how you and your team will deal with the time drain as you try to operate the business as usual while providing the buyer with all the interviews and documents and data they’re going to need to get comfortable with the purchase. Your team will lose at least two to three weeks and possibly more going through this process.
Takeaway #2: CRMs are surprisingly inconsistent. We pulled CRM data for reports to populate the data room (data room is a fancy way of saying a box.com account set up for all the documents related to the sale/purchase). We created the reports and posted them in the data room. Then, the due diligence team asked us to recreate the reports by pulling the data live. It came back different from the first time. We ended up spending about a week trying to recreate the first reports we put together and finally succeeded by reverse engineering it by working with the person who originally pulled the data. Whew!
Takeaway #3: Shared services models can present additional challenges. We use a shared services model where certain non-core operational functions (like accounting, marketing and logistics) are housed in separate companies and provide their specialized services to several companies throughout our portfolio companies. This is a great idea to save the costs of having separate and duplicate teams performing these services in all the individual companies. The challenge is that critical services like marketing, sales and logistics either have to accompany the company you’re exiting in the sale (leaving all the other companies without them) or you have to create contracts to provide those services to the company your selling post-sale, which can add substantial time to the closing process and additional complications in the form of multiple additional services contracts.
Takeaway #4: Be ready for surprises. As we went through FDD, we realized that we miscategorized a substantial amount of merchant fees due to our shared services model. That resulted in the loss of almost $2 million of valuation as it negatively impacted EBITDA. Also, the buyer wanted to disregard the value of any barter transactions, lowering valuation by another $1 million. There were other “adjustments” as well, ultimately making the deal, if we accepted those deductions, a good bit lower than we originally had imagined. Fortunately, we anticipated that something like this might happen, so we had multiple back-up plans to recapture the lost valuation.
Takeaway #5: Expect to negotiate throughout the entire transaction. Because you will continually discover things that you thought were one way are actually another way (like merchant fees, money, working capital, convents not to compete, CRM reports, contracts you thought you had – or thought you didn’t, last minute litigation issues, taxes, the potential is almost endless), you will need to be prepared and ready to compromise, adjust your expectations and re-negotiate points that you thought you had already resolved earlier in the deal.
Keep these things in mind if you’re thinking about selling or buying a business, so that you don’t have any unpleasant surprises if you get into the actual process.