5 Tips to Prepare You for Due Diligence
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Founders/Owners can get extremely exposed and emotional during a due diligence process, whether to fund raise for their company or to sell it outright. This short article acts as an explainer as what to expect and prepare yourself for a Due Diligence process. These processes typically take up to 6 months to complete from beginning to end and there are usually plenty of twists and turns.
1. TIME
You are going to need more time than you expect.
Whatever business you are in or whatever stage of your company’s journey you have an important role to play. Whether its hard decisions to be made on strategy, or lead generation, or product roadmap delivery, you as a founder/owner are crucial to your business. Your time is most valuable commodity you have.
In this regard you literally don’t have the time to be pulling information from everywhere within a tight deadline. It just isn’t sustainable. The list of requested corporate information can be overwhelming and you will need to dedicate time toward preparation before any12 week exclusive due diligence process starts.
2. ALWAYS MORE
While you might be 80% ready there will always be unique questions in a process
Even though you are the most prepared that you can be, it still isn’t going to be enough. Unique and specific requests can come from different perspective investors / purchasers that are important to them or are how they analyze information. In addition any information or response you do provide could have a multitude of additional queries stemming from them.
“There are the known unknowns: that is to say, there are the things we now know that we don’t know. But there are also the unknown unknowns: there are the things we do not know that we do not know.” - Donald Rumsfeld
You can be prepared but always expect more to come during the diligence process. Expect the known unknowns and unknown unknowns to arrive and you will be better positioned to deal with whatever comes your way.
3. CURVE BALLS
There are always curve balls in any process.
Everyone wants a smooth process, you do, your team does, any professional on the transaction and the perspective purchasers/investors. If the incentives are aligned everyone should be pushing forward together.
That being said throughout a due diligence process you are ultimately witling down to key “redline” points. The points that move the dial on whether this is a deal to complete or not. It’s important to break down the “must haves” from the “would likes” as quickly as possible so that more attention can be given to the “must haves”.
You might give a concession early in the process on the agreed Terms only for a key amendment to be sought later, and you wish you never gave the first concession to begin with. It is a topsy turvy process at times. The important part is to remember what are the original goals and are you achieving them.
There could be testing times and you will need to lean on the support around you.
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4. SUPPORT
You will need other professional support.
You may think that you have a good relationship with the Investors or Purchasers or that it is a simple transaction and you can keep things small and affordable by avoiding to use a professional team. You would be wrong though. You are going to need a team to support you on a transaction from a legal, to a finance, to a specific tax perspective.
These supports do come at a cost but you are not pulling resources from your own team to deliver these (unless you are big enough to have an inhouse legal counsel). These professionals will give you the benefit of their experience at a time when you may find it hard to tell the wood from the trees.
You will be able to strategize with your team and they will be able to have conversations that you cannot have with their counterparties on the other side of the transaction. They can talk about points that you feel uncomfortable about and can negotiate them in or out as required. It may add to your transactional costs but the squeeze is most definitely worth the juice for the most part. Pick your professional well and always rely on recommendations and levels of market activity.
5. DISTRACTING
The final process will be time consuming and will distract you from your business.
I touched on how important your time is and how important you maximize your time before a due diligence starts in order to help achieve your ultimate goal. Expanding on this concept, its important to know, that your day to day usual operating style will be tested and distracted during a diligence process too.
Not only will you be unable to cover all the ground you had been able to cover on your business directly, but you may have to hide the fact that there is even a potential deal happening for confidentially reasons (particularly in the event of a sale).
You may also find yourself in a conflicted position, whereby you want to grow the company but the valuation you are achieving for the business does not justify the additional CAPEX or OPEX spend. These may even be capital investments that you never see the benefit of or you hold off making a key hire as it would increase your Fixed and Variable Overhead. Deep down you need to understand that any deal you are working on, may not actually complete and you will be left with the business as to how you ran it during a 3-4 month due diligence phase.
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