De-Mystifying Due Diligence
Due diligence is a crucial and time-consuming component of any M&A transaction.
The success of most acquisitions hinges on the success of the process of due diligence: providing and verifying the relevant facts and financial information about the seller to the buyer.
On Colonnade Advisors’ Middle Market Mergers & Acquisitions podcast, we devoted four episodes on the topic and break due diligence into its four main components:
- Business
- Legal
- Accounting, and
- Technology
Coming up soon: An episode all about data rooms and their role in creating efficiency in the M&A process.
In this post, we share an overview of advice from each of the podcasts. You are invited to listen to the full episodes via the links provided.
Business Due Diligence
The title of our episode about business due diligence is “Uncovering the Skeletons in Your Closet.” We discuss how the seller needs to tell their advisors the good, the bad, and the ugly during this initial due diligence phase – and throughout.
In our discussion on the podcast, we emphasize the importance of sharing the company story. When and where was the company formed? Why did the entrepreneur start the company? What is the corporate history? What are the major operating entities? We formulate the presentation of the answers to these questions, along with the passion for the story from the founder/entrepreneur, into a compelling story that ultimately drives the sales process.
We summarize our takeaways into two key points from our conversation about business due diligence:
1) Organization is crucial in this process; every document will be requested, every question will be asked.
2) Prepare so there are no surprises; every rock will be overturned.
Click here to listen to the full podcast.
Legal Due Diligence
The title of our episode about legal due diligence is “Deep Clean and Hygiene.” We use metaphors such as the deep cleaning of closets and going to the dentist for painful, but necessary, maintenance work.
We advise that if you’re thinking about selling your company three to five years from now, an attorney should be reviewing your materials now.
Attorneys look at documents to make sure the company is properly formed and registered. They look at shareholder documentation, employment agreements, and applications/licenses that are necessary for the company to do business.
The process is really like a house cleaning exercise on the legal front. Everything that the company has put in place historically is vetted.
We invite two guests on the show to provide their perspectives on legal issues for the due diligence process.
Jeff is joined by Will Turner, formerly a partner at Steptoe & Johnson and now a partner at Greenberg Traurig, to discuss pitfalls that sellers can avoid as they think about getting ready to go to market.
Gina is joined by Rob Humble, Senior Vice President of Strategy and Corporate Development at IAS. Rob shares his insights as a buyer on legal issues that arise in diligence.
There are three key takeaways from the episode:
- It is never too early to get your attorney involved when preparing for legal diligence.
- Legal issues will not necessarily kill the deal, but certain structures must be established for any outstanding legal matters.
- Sellers must know what legal issues might be relevant in a sale, and they must discuss the issues with their advisors in advance.
Click here to listen to the full podcast.
Accounting Due Diligence
The title of our episode about accounting due diligence is “It’s All About Your Numbers.” We talk all about compilations and audits, forecasts and budgets, and GAAP and cash accounting.
We bring on accounting expert Joe Kaczmarek to share his insights on how companies can best prepare for an M&A transaction. Joe is the National Fintech practice leader at RSM, a leading provider of audit, tax, and consulting services focused on the middle market.
We emphasize that for a company to be sold at the highest price, it must have infrastructure and value as an enterprise. A company that is just the founder still doing most of the functions does not have enterprise value.
Sellable companies have the marketing, sales, HR and finance functions built out. The business can run on its own without the CEO. A strong “bench” always includes a top-notch CFO.
We urge companies to not cut cost corners by avoiding hiring a CFO. It doesn’t pay off. In fact, when a buyer comes in, they will do a negative adjustment to a company’s historical financial statements to fill that role. That CFO role will be built into your valuation regardless. So invest in the CFO.
There are six key takeaways from the episode:
- Start early
- Review your financials monthly
- Keep books in GAAP (Generally Accepted Accounting Principles)
- Get an audit
- Prepare forecasts for your business and track achievement to forecast
- Invest in the finance department. If your goal is to sell your company, the number one action you should take (related to accounting and finance due diligence) is to get a good CFO
Click here to listen to the full podcast.
Technology Due Diligence
The title of our episode about accounting due diligence asks the question: “How Scalable and Secure are Your Systems?”
This episode covers the aspects of due diligence that fall under technology (intellectual property, systems, databases, etc.) even when the company is not a technology company.
We remind listeners that every company is tech-enabled, so every company is going to have some element of technology that they utilize every day.
Technology due diligence is looking at tech-enabled companies and making sure that the company is not “tech disabled.” Meaning, the platforms, systems, and policies and procedures that the company has in place can fully support the growth plan.
In this episode, Gina is joined by our featured guest, Rob Humble, Senior Vice President of Strategy and Corporate Development at IAS. Rob shares his insights as a buyer on technology issues that arise in diligence.
Click here to listen to the full podcast.
Data rooms
Coming Soon. We are excited to share an upcoming episode of our Middle Market Mergers & Acquisitions podcast.
The Middle Market Mergers & Acquisitions podcast is available for listening on iTunes, Spotify, and all major platforms. You can subscribe to the podcast information page or any of the episodes on Colonnade Advisors LLC’s website.
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