EBITDA+ Due Diligence.
Making a difference in Due Diligence.
This is the fifth post in our series outlining Morgan Shaw Advisory’s, EBITDA+ SIX STEPS TO SUCCESS™. Our proven methodology for successfully selling a business and enabling business owners to engineer their own $30 million exit.
Whilst already a well-established financial metric, also widely used to value businesses, in this context EBITDA+ SIX STEPS TO SUCCESS™ stands for:
Due diligence
After the event.
The stage immediately following the signing of the NBIO (Non-Binding Indicative Offer) is the Due Diligence Process. This is where the buyer(s) do all the checking and testing of the business in order to be satisfied that the business is worth the price they offered in the NBIO.
Throughout the process, an owner must disclose virtually all relevant information (except for items protected by law). This will include; details of customers, suppliers, the prices they charge, the margins they achieve and their future pipeline of opportunities.
How exhaustive and detailed a due diligence is depends on several factors, including:
The capability of the buyer
The professionalism and completeness of the Initial Information provided
Any discrepancies found compared to initial disclosures
The price being paid for the business
The type of purchase – e.g. asset sale vs. a sale purchase
How keen the buyer is to acquire the business
If there is any competitive tension, i.e. there is another party in discussions.
Managing the due diligence itself is a skill. It requires a disciplined approach to ensure that all information is professionally presented and that questions are responded to in a full and timely manner. The quality and accuracy of these responses is essential, as the buyer is making their valuation based on their own analysis and the information you have provided and ultimately a legally binding offer.
Due diligence also marks the introduction of both party’s legal team in two key aspects:
The creation and execution of the sale and purchase agreement (also known as a business sale agreement)
And, the leading of legal due diligence.
Many people believe that managing and executing the ‘legals’ is something that can be and should be left to the lawyers. At MSA, we disagree, in our experience managing due diligence is another crucial area where an experienced and skilled advisor can add real value to the sales process.
In every sale and purchase agreement, there are two key elements: the Legal aspects and the Commercial aspects.
As the sale process goes through its many twists and turns, there will be a need for each party to give some ground in order to adjust the agreement so that it is fair and representative of issues as they unfold.
A lawyer cannot, and will not, make a commercial judgement, it is not their remit. Nor do they have an in-depth knowledge of the company’s financials to make informed commercial decisions. Therefore, if an owner isn’t comfortable: liaising with lawyers; interpreting legal documents; and in negotiating key points of the deal, along with making the necessary commercial decisions, then this is another area an experienced advisor can add significant value.
Advisors can lead the process, keeping things moving along and on track in what can be an extremely emotional journey. Where they really earn their fees, however, is at the 11th hour, when ‘deal breaking’ issues can be discovered. Using their discipline and experience, they can keep a calm head and importantly, ensure that everyone else keeps theirs too, while negotiating a positive outcome for both parties for a successful sale.
Emotionally the buyer and seller have decided they want to do the deal and subject to everything holding up in due diligence, believe they will complete. It is important that whilst the legals must not be undermined and are extremely important, they shouldn’t become deal stoppers. And, without careful management, there is a risk that they could.
In the next and last blog in this series, we’ll be looking at what happens after the deal is done! If you want to get this series in an easy eBook, giving you all the steps and more… just click here.
Corporate advisors, like Morgan Shaw, keep the sales processes effective and efficient, whilst keeping everyone involved safe and sane. Working with a professional can significantly increase the value in your business and will ultimately result in a more favourable transaction, improve sale terms and achieve a higher purchase price.
To understand how you could engineer your own $30 million-dollar exit, learn more about our EBITDA+ SIX STEPS TO SUCCESS™ connect with the Morgan Shaw Advisory team here.