DD is where the “rubber meets the road” so to speak, as it allows any potential buyer to verify, validate, and very often challenge the representations made and summarized in the LOI about the business and the quality of such business. It’s a ritual examination of the seller’s ENTIRE business operation, and it always begins with a request for a weighty pile of documentation, including current and historical data records, financial analysis and summarization, as well as descriptive narratives of each departmental function and employees’ roles.
After seeing the DD request list, the seller at that moment realized they were in way over their head. They had never sold a business before, and were working 10-12 hours a day, 7 days a week just to keep the operation running smoothly. With no relevant deal experience and little free time to deliver all requested information in a timely manner, the seller felt they were at serious risk of losing this deal and/or harming the daily operation. This is where the value of an experienced full-service business broker like Iconic Advisers came into play. A broker will have experience in selling a product or service business, whether large or small. They will also manage the required tasks (collecting, organizing, analyzing, and summarizing) to move the ball forward with one or more qualified buyers, prepare for the onerous DD phase, and ultimately close the transaction.
Let’s look at the seller’s “Heavy Lifting” tasks that are present in the potential sale of any business.
PART I. Data Collection
Business buyers on the acquisition trail, whether large or small, vary in their product and service offerings, business structure, and financial reporting requirements, so it’s common for buyers to make requests for a variety of information. Buyers always need essential financial and operational details that must be collected and summarized for disclosure in DD. If you’re planning to shop the business around to more than one suitor, you won’t necessarily know the scope of their DD requests, so you should be fully prepared by collecting ALL information the business has at its disposal in advance of any information requests. Below is a list of what all buyers ask for, as well as additional details the more sophisticated buyers also look for.
Always Requested Information
Financial & Tax Info
| 3-Year & Year-to-Date Financial Statements |
Accounts Payable Aging Report |
| 3-Year Federal & State Tax Returns |
Customer Prepayments |
| Multi-Year Bank Statements |
Prepaid Expenses |
| Trial Balance & General Ledger |
Bank Loans & Other Indebtedness |
| Accounts Receivable Aging Report |
Real Estate and Equipment Leases |
Operations Info
| Contracted Customers List |
Intellectual Property |
| Material Contracts (assumable by buyer) |
State & Environmental Permits |
| Equipment, Inventory, Vehicles (basic) |
Human Resources |
| Furniture & Fixtures |
Insurance Policies |
| Information Technology & Software |
Lawsuits and Claims |
Often Requested Information
| 5-Year Financial Statements & Year-to-Date |
Vehicle Details (by VIN) |
| 5-Year Federal & State Tax Returns |
Training Programs & Manuals |
| Multi-Year State Sales Tax Reports |
Hazardous Materials & Storage Facilities |
| Accounting Compliance Testing |
Payroll Tax Returns and Payroll Reports |
PART II. The Jigsaw Puzzle Predicament
Assuming you collect the requested documents for the first phase of DD, you simply cannot hand it over in piles to the buyer for them to sort through and figure out how to get answers to their preliminary questions about your business. Just imagine dumping a 1,000-piece jigsaw puzzle on the table for a child to assemble, with no image on the box to guide them as to what the total picture looks like. The interest in the puzzle will be short-lived. So, for you to gain the interest of a buyer, further homework and effort is required to convert the mounds of paper into something that is user friendly, concise, provides answers and anticipates and responds to questions asked as well as questions more to come. Buyers have short attention spans and if they are simultaneously looking at half-a-dozen other acquisition opportunities then be mindful of their time which comes at a premium.
If you’re fortunate enough to use any of the more feature-rich customer relationship management and accounting software packages, you should be able to generate operational reports and financial spreadsheets that when analyzed and further summarized will present a clear picture of the business. This would be a snapshot of and growth trend of your revenues, cost of goods sold, gross profit margin, earnings before interest, taxes, etc. (“EBITDA”), and customer mix by type, service and/ or geography.
Put yourself in the buyer’s shoes for a moment who may be looking to acquire one out of four acquisition targets in your local geographic footprint. If one of the four potential sellers provide a buyer with a 3-year financial analysis and operational summary while the others deliver a cardboard box full of papers without analysis and organization, which business opportunity do you think the buyer will want to explore first? Exactly!
Not only will an experienced broker oversee the data collection effort, but they’ll also take the time needed to organize the data, analyze it, and summarize your relevant financials and operations in a way that best represents your overall business value to a prospective buyer.
PART Ill. Presenting Your Distinct Advantages
Everything you and your broker have done to this point leads to the creation of a Confidential Business Memorandum (a/k/a “Board Book”). All the data analysis and summarization are rolled into this document. This is the sales collateral that if properly crafted, will set you apart from all other sellers and entice a prospective buyer into continued discussions. The Board Book paints a clear picture of the company, its customers, the product and/or service revenue stream(s), financial health, fixed and intangible assets, management team, employees, facilities, and equipment. It’s like having a virtual tour of a home that you’re trying to sell, leading interested parties into envisioning themselves as the new owner and believing yours is the best and only acquisition choice.
PART IV. Getting to a Letter of Intent (a/k/a “Term Sheet”)
Now that a prospective buyer has looked over your Board Book and asked some additional questions, and maybe even attempted to devalue one or more parts of the business, you reach agreement on a purchase price. A buyer will prepare a non-binding Letter of Intent (“LOI”) which will be reviewed by the broker and seller with further negotiations and edits ensuing, until it reaches final form and is signed by the seller and buyer.
PART V. Additional Information Requests
With the ink of your signature still wet on the LOI, the buyer will most assuredly make a request for an extensive amount of financial and non-financial information as it moves into the DD phase. But guess what? Since your broker knew in advance what information would be asked for (by any number of buyers), the bulk of the requested information will already be assembled, scanned, and uploaded to an online data vault soon to be shared privately with the buyer’s acquisition team. All that preparatory work done in assembling the Board Book and negotiating a LOI will simplify and expedite the typically arduous DD process making it easier to move forward to the Purchase and Sale Agreement and closing of the transaction.
Knowledge Matters
When looking to sell your business, keep in mind it’s not simply a matter of speaking with a prospective buyer that results in an offer and then signing a standard Purchase & Sale Agreement. There can and will be many pitfalls along the way. Working in combination with a professional team of seller’s advocates (Accountant, Broker, Attorney) will help ensure that the selling process leads to the best possible outcome for you.
Keep in Mind
- Buyers are always in the market for profitable businesses
- Your accountant, attorney, and broker must all work together to achieve your goals
- There are good and bad ways to approach a prospective buyer
- There are many DO’s and DON’Ts related to selling a business
- Look for an experienced M&A adviser who can speak to all business topics: accounting, business software, legal, tax, operations, personnel, and retirement-related issues
What You Can Do
If you are thinking about selling your business but aren’t sure what your business is worth or how to go about initiating a sale, we are here to help you. Contact us for a free 1-hour exit planning consultation. It is confidential and without any obligation. You only have to share a few things about your business, and we will make an overall assessment and answer any questions. This free consultation should help you in making sure that such a life-changing decision to sell is right for you.
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