Published on March 14, 2023
Congrats!!! You have spent years working on your company and one day you open your inbox and see that someone is interested in buying your company. You hop and a call and in a short amount of time the conversation moves to acquiring your company at an amount that you never thought was possible. You tell your family and in everyone’s mind the deal is done and people are already planning on how to spend the money. Once again, Congratulations!!! When that email was received, you might have had some doubts about the validity, but when numbers came up, there was so much excitement that it had to be true. You never ask any questions, but really, why would you? After another call a Letter of Intent (LOI) is signed, and due diligence starts. Six months later, while still in due diligence, you are exhausted. Constantly fighting with the family over when everyone will get to take the promised vacation, constant stress at work for not being able to focus on running the business because of responding to the buyer's ceaseless amount of item requests… the buyer is just so close to being comfortable enough to close that you just have to keep going.
Then one day the buyer decides it is no longer a deal they want to participate in and they disappear. The deal is not going to happen! Your life is ruined. Over the past year there has been so much stress and fighting that it has taken its toll on every part of your life. Your wife files for a divorce, your company is now underwater because you were unable to focus on it, and the stress of everything is causing you major health problems.
A year goes by and then one day you are at the golf course and strike up a conversation with someone that knows the group that said they wanted to buy your company. That person went through the same situation that you did. After the conversation, it dawns on you that the buyer that was going to make all your dreams come true, never had the capital you thought they did…it was all smoke and mirrors.
What if I were to say that the months of pain and fake promises could have all been avoided? That this scenario happens more than you might think.
You can and should do Due Diligence on potential buyers.
If the seller had done this early on, think of how different things would have been. Conducting Due Diligence on the potential buyer is something that should be done as early as possible to save your and everyone's time and resources and to really understand the true situation that everyone is in.
What would be considered due diligence on the buyer?
Here are some ideas in performing due diligence on a potential buyer:
Check their track record: Look into the buyer’s history of acquisitions, as well as their overall business track record to assess their stability and experience. If they say that the last ten Letters of Intent that they signed, they only closed one of them. That could be a giant red flag! If they say you would be their first acquisition, yes, another red flag…
Verify their financials: Review the financial statements of the buyer, including their balance sheet, income statement, and cash flow statement to ensure they have the financial resources to complete the purchase. They are looking into yours, why not ask to see theirs?
Evaluate their management team: Get to know the key players involved in the buyer’s decision-making process and evaluate their level of experience and expertise and take a temperature check on how excited they really are for this transaction to take place and find out why. Not the surface level reason, but really try to dig deep. Take every opportunity to ask them questions. Don’t end each meeting with silence from your side of the table, make them sweat a little.
Assess their plans for the company: It’s important to understand the buyer’s plans for the company after the acquisition, including their intentions for the current management and employees, their plans for growth, and any changes they plan to make to the company’s operations and really think to see if the vision they are telling you really makes sense. Has it been thought out to a level that makes you feel comfortable they have planned for the future?
Review any legal issues: Investigate any current or potential legal issues the buyer may be facing, including any lawsuits or regulatory issues. (This and many of the items already mentioned, the buyer might be hesitant to share, but since they are diving deep into your company, asking questions about them is only reasonable. Remember this common theme…ask them questions!)
Evaluate their customer base: Determine the buyer’s customer base and their level of stability to ensure that their revenue streams will be maintained during the long due diligence period and after the acquisition.
Get references: Speak with other companies or individuals who have worked with the buyer in the past to get a better understanding of their reputation and business practices and try to find out and talk with someone from another company they acquired and from a company they went into Due Diligence with, and things didn’t work out.
In addition to the above steps, it’s also important to work with a team of professionals, such as lawyers, accountants, and Investment Bankers. Many of these professionals are in a position where it is ok for them to ask certain sensitive questions. In fact, a benefit to working with someone like an Investment Banker is during the deal, if they are seen as the “bad person” it is fine, because they will take the bad karma with them after the deal closes and they are no longer in the picture.
Overall, experts can provide valuable insight and help to mitigate potential risks associated with the sale and can share their experiences with past deals to help in identifying potential warning signs.
It’s important to remember that due diligence is an ongoing process, regularly monitoring the buyer’s progress and ensuring they are meeting their commitments can help and if they are not, find out why.
In conclusion, conducting due diligence on a potential buyer is crucial when selling a company. It should not be done at the last moment, but started as early as possible, as it helps to minimize risks and ensure that the buyer is a good fit and capable of successfully closing the deal. So, from the very start, ask yourself questions, ask the buyer questions and bring in experts to ask as well...Keep asking Questions!
*** The content is not intended to provide legal, financial or M&A advice. It is for information purposes only, and any links provided are for your convenience. Please seek the services of an M&A professional(s) before entering into any M&A transaction. ***
For More Information
Shawn Flynn is a Principal at Global Capital Markets, a premier middle-market investment bank with a global presence. Shawn has expertise in mergers and acquisitions, capital markets, financial restructuring, and secondaries. He speaks Mandarin and is the host of the award-winning Podcast The Silicon Valley Podcast. Connect with him on LinkedIn.
Shawn Flynn, Principal SF@GlobalCapitalMarkets.com
Tel (415) 578-1445 Ext. 4
About Global Capital
As a middle market investment banking boutique, Global Capital provides mergers and acquisition advisory services, access to corporate debt and equity capital, and strategic advisory services to successful middle market companies. For over twenty five years, our team has offered companies a unique blend of sophisticated financial expertise and access to the global marketplace of buyers, sellers and financiers.
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