It’s the first full week of May and that means… it’s THEME WEEK.
We’ve slowly been working through every step of the dealmaking process, and this week I’m going to be talking about the more crucial aspects of deal execution.
Once you find a business, negotiate, agree on terms and sign a letter of intent (LOI), there are several things that need to happen in order to get to closing day…
Not least of which is due diligence (or DD for short) — where you ensure the business IS as presented.
There are FOUR primary forms of due diligence:
Let’s walk through each one…
Financial DD is all about verifying the business financially. Things like:
Legal DD verifies the business is safe to buy and assesses any potential risks by understanding the liabilities and obligations of the business. It will vary depending on whether the deal is an equity-based deal or an asset-based deal.
Legal DD will also verify that the seller actually has the legal right to sell the business (you would be surprised to know this isn’t always the case!).
A few of the main categories include:
Commercial DD is all about the market and attractiveness of the target business within it. You will have already done some of this during the deal vetting and seller meeting phases, but now it’s time to dive as deep as possible on things like:
And finally, there’s lender or financier DD.
This can vary between an equity investor and debt provider, and also varies depending on whether the deal involves a cash-flow lend (SBA loan) or an asset-based lend where you borrow against the assets (AR, inventory, real estate, equipment, etc.) in the business.
Lender due diligence tends to draw from the other categories of DD.
If any of the DD items above weren’t accurately represented or revealed at the time you agreed to the deal, you can choose to renegotiate the terms… or walk away.
The good news is… YOU don’t have to do any of the DD, especially not the financial and legal DD. Hire a contingent-fee CPA and lawyer for those aspects of the due diligence, respectively.
You don’t even have to do the commercial DD, though I often like to personally. You can hire a consultant from the industry to do this for you, and either pay them a contingent fee OR partner and provide a small percentage of equity ownership at closing.
(However, it’s fine to do some of the commercial DD yourself. Since you will want to have a growth plan for the business as soon as you close the deal, understanding the market opportunities is important.)
As you aren’t doing any (or very little) of the due diligence, your job is to be the quarterback so that the deal continues to move forward at a steady pace.
This will involve coordinating between the respective deal advisers, namely:
And if you are raising external financing, you will need to coordinate with the funder’s lawyer and the external CPA.
The key is to control and manage the flow of information.
Legal information will typically flow between lawyers but definitely keep on top of it. Be in constant contact with your lawyer and make sure they are on track.
Financial information will typically come to you either directly or via a data room, Dropbox, Google drive, etc.). Be sure to give your team access to it.
If you find bottlenecks — say the seller’s lawyer is being really slow responding to questions or seller’s CPA is late providing the data both you and the lender need —, don’t hesitate to leverage your relationship with the seller.
This is CRITICAL throughout deal execution. Advisers can be slow at times. They can start fighting.
Your job is to liaise with the seller (with whom you have built up a great relationship by now) and keep the deal on track. Though you can’t kick the seller’s CPA or lawyer into high gear, the seller can.
Remember, the seller wants the deal closed as quickly as you do… Retirement, closing payment, relief, whatever the reasons are.
So create a schedule, keep track of the key players and dates by when various DD should be completed, manage the project and flow of information….
And go close some deals!
I’ll be back next time with a piece on why you CANNOT neglect to forecast the cash flows in the business during the deal execution phase.
Until then, bye for now.
