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Due diligence: A seller’s perspective

- John Mickelson, managing partner Midwest Growth Partners, is IowaBiz's blogger on succession planning. Read more about him here. 

Congratulations!

Years ago you mapped out exactly what you want to happen with your succession plan.

You have worked with your family and a team of professional advisers to execute that succession plan and therefore have put your company in the best possible position for a sale – achieving both the financial and the nonfinancial objectives that are important to you.

You identified the exact right type of buyer for your business and within that group identified the exact right buyer for your business. (Note: All of these subjects above are explored in previous articles.)

A letter of intent (LOI) has been signed by you and your buyer outlining the major pieces of the agreement (sale price, type of transaction, transition period, etc.), and now you and your buyer have 60 days to get the transaction closed – a time period often called “due diligence.”

The hard part is over, right? For a seller who has not previously been through a sell-side sale process or is unprepared for it, oftentimes the answer to this question is NO.

Remember, the business owner has often spent their entire life building up this company, and thus has not sold a company before, so this process is totally new to them.

On the flip side, the buyer has to make an educated risk-reward decision, and so identifying as many potential company surprises before close is important to them before they commit significant capital to buy the business. Many times they cannot “see everything” in a business until they have executed an LOI with the seller.

During diligence, the buyer will often:

  1. Send in third-party accounting experts to conduct an analysis of the company financials and cash management practices. This is often called a “Quality of Earnings.”
  2. With the seller’s permission, reach out directly and/or hire a third party to reach out to key customers and vendors to understand how they feel about their relationship with the company.
  3. Conduct environmental and title review of any company-owned real estate.
  4. Have an attorney draft definitive deal documents (which seem more excessive than necessary and take the terms of the LOI into infinite detail).
  5. Iron out employment agreements with remaining employees.
  6. Hire a third party to conduct personality tests on remaining employees.
  7. Identify the bank they intend to use after the transaction, which will have its own set of questions and requirements (may include a “field exam”).
  8. Identify the property and casualty insurance carrier and employee benefits carrier they intend to use after the transaction, and they will have their own set of questions.
  9. Do an underwriting process for key man life insurance.
  10. Conduct background checks on key personnel.

... Just to name a few.

To the unprepared seller, this will feel like a lot and like they have to answer the same questions over and over again.

To the prepared and organized seller, all this can be done efficiently and with little heartache within the roughly 60-day time period for diligence. After which, thanks to the seller's well-executed succession planning plan, they will be able to move to the next phase of their life under their own terms.

Comments

Thorough and explained in a common sense way, as usual. Good blog, John.

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