EDGEMONT CAPITAL BLOG

Avoiding Due Diligence Missteps

As a business owner, going through the process of selling your business can be long and trying. From providing all the information needed to compile the Confidential Information Memorandum (CIM), to long arduous calls and meetings with multiple interested parties, the time and effort involved is significant.

Once you have come to terms with a qualified buyer, the last thing you want to endure is a major incident during due diligence – a diligence bomb! – that could derail the entire transaction.
Below we examine a few methods to help ensure the avoidance of due diligence missteps.

Work with a Qualified, Reputable Advisor

One of the keys to ensuring your business is well-positioned to be sold for maximum value is catching any potential issues before you go to market. If you hire a qualified and reputable M&A Advisor this should not be an issue. One of the primary value-adds of an M&A Advisor is having a qualified third party on hand to do their own pre-diligence to uncover and help fix any issues before they become an issue for a buyer.

Defensible Recast EBITDA

It is not uncommon to be very aggressive when it comes to recasting EBITDA. After all, this is the primary metric that most buyers base their valuations around. Besides interest, taxes, depreciation and amortization, adding back one-time expenses, recasting over-market salary, and adding back non-business expenses is completely within the realm of reason. The issue is when the add-backs get a bit too creative to bolster EBITDA. Any qualified buyer will see right through overeager add-backs and the result will more than likely be a hit to value. EBITDA add-backs need to be defensible.

Working Capital Adjustments

The negotiating of a reasonable level of working capital at close is always debated rather voraciously during the due diligence period. Again, reputable buyers are not looking to be unfair and you, the seller, should approach working capital the same way. One way to ensure you can come to terms on a reasonable working capital requirement is to make sure that your financials are GAAP compliant. GAAP compliance levels the playing field in that all parties understand accounting methods and can easily understand the way metrics, like working capital, are determined.

Be Upfront About Exposure

Honesty is always the best policy. If the business is exposed to pending litigation over intellectual property or there are issues with former employees, it is always the best practice to let the buyer know early on. Waiting for the buyer to uncover these types of things during due diligence indicates you have something to hide and this turns buyers off. Sometimes enough to walk away, other times enough to lower value.

Prepare, Prepare, Prepare

Due diligence can be tenuous enough without any pending issues that could destroy the deal. There is typically a lot of money at stake and both parties are well vested in the deal closing. Making sure you’ve done your own internal diligence early on is a key component to ensuring no surprises arise down the line.