Put Diligence First

After months of marketing your business and negotiating with a qualified buyer on the deal value and terms of a purchase it is now time for the confirmatory process known as due diligence.

Due diligence is the all-encompassing name for the period where the buyer of, or investor in, your Toronto based business seeks to fully understand all the potential risks in investing their hard-earned (or raised) dollars in your going concern.

Plainly said, they want to make sure they are not acquiring a lemon that will leave them in a financial lurch down the road.

In many instances, buyers and investors will hire professionals like accountants, lawyers, technology consultants and more to help them through the process. This process can be time-consuming and arduous. On top of that, buyers will also want to review all contractual obligations relating to the business including employee agreements, leases, bonus plans, health coverage, royalty agreements, distribution agreements, supplier agreements and more.

If your eyes are not crossed yet – there’s more. Most buyers will want to get a handle on what they can expect in the coming years. They will want to see financial projections and gain an understanding of opportunities they can exploit for growth. Some buyers will even want introductions to key employees, customers and suppliers.

More than that, they’ll want to get an understanding of any potential environmental issues, software and technology issues and legal issues including ongoing lawsuits and potential claims against the business at all levels of jurisdiction.

The amount of information needed may be daunting, but if you look through the lens of the buyer it begins to make sense.

Canadian private company M&A is not like the public markets. Buyers, for the most part, are purchasing illiquid assets that cannot easily be exited like a publicly traded stock gone south can be. They need to be as sure as possible that their investment is solid. In the case of financial buyers, a bad investment can put serious pressure on a group’s relationships with its limited partners or investors.

All that said, due diligence can sometimes uncover issues that can be detrimental to the value of the business. This is where hiring an M&A advisor or investment banker, savvy to the diligence process in your market or industry, can pay dividends – pun intended. M&A advisors or investment bankers do a lot of their own diligence upfront during the process of preparing the Confidential Information Memorandum – the document used to market your business to interested parties.

The process can take a lot of time and it can be tedious ensuring that all the data presented is correct, but there is a purpose to all of it – maximizing the value of your business.
As a seller, being honest and upfront with your business broker or investment banker is absolutely paramount. They want to know the good, the bad and especially the ugly so that they can head off any issues at the past and present your company in the best possible light.

Once all the cards are on the table and buyer understands what they are buying and what opportunities lie ahead they will be in position to offer the best price they can for your business.

If you have questions about selling your business, click here to contact Quest Partners.