What matters most the ‘value’ struck at the beginning of a deal or the cash received at deal completion?
Frequently Business Owners can suffer a considerable loss of value between the headline deal and completion. From a Buyers perspective he or she wants to minimise the risks of acquisition. Due Diligence is the norm for buyers who wish to understand their target but this can be a significant stumbling block for business owners wanting to sell.
Understanding what Due Diligence is all about, when it is employed and what the objective is will help you be better prepared. If you are thinking of buying a business (and it is a great time to make an acquisition), then an awareness of Due Diligence types and strategies will help reduce the perceived risks and may often help negotiations.
Key Due Diligence techniques include:
Commercial – this due diligence (DD) starts with an experienced review of the business type, identifying the real business drivers which make it tick, followed by targeted analysis of those key areas. So Commercial DD might include looking at the analysis of sales, significant contract terms and the tracking of key business drivers – sometimes referred to as KPIs.
Commercial DD can also focus on what the sustainable Profit or EBITDA is for the target business.
Financial – Financial reviews tend to concentrate on the Financial record of the business, so examining the accuracy of balance sheet categories such as plant & equipment, or the correct valuation of land & buildings, or the recoverability of Debtors. These reviews may also include a review of the Management Accounts – do they present a fair ‘financial window’ informing the management team on key decisions?
Other Due Diligence – There are many other ‘flavours’ of Due Diligence – more on other Due Diligence. These methods tend to be introduced depending on the key perceived risks identified by the Buyer or his or her advisers. So for example a company with final salary pension commitments would need Pension due diligence. Similarly an acquirer taking on freehold or leasehold property would need property DD, both legal and from a suitable RICS surveyor.
The End Result
The most notable example of the impact of Due Diligence was an acquisition when the initial Heads of Terms value of £9m was reduced to £3.3m through the Due Diligence process; a substantial value erosion for the sellers but a great deal for the Acquirer!
Our Virtual or part time FDs have extensive experience of both instigating and also responding to Due Diligence reviews; this places them in an ideal position to assist, either by our cost effective Commercial Due Diligence or by helping prepare your business via our Strategic Exit Review.
As ever please do contact us if you would like to discuss any aspect of Due Diligence. Also please do forward this newsletter to any business owners who could do with some cost effective help!