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Ask the investment banker: How do I survive due diligence?

Congratulations! You’ve got a seriously interested buyer (or investor) in your business and


agreement on the terms of a deal. Now comes the due diligence process where your goal is to rapidly give your buyer all the information needed to close. While it may seem like you’ve already done the hard part in reaching an agreement, due diligence is both critically important and fraught with pitfalls: all investment professionals have seen deals go south when it isn’t done properly.

On a high level, in due diligence you disclose the history and future plans of your business across all aspects of your business, including operations, administration, financial, tax, human resources and legal/IP. The buyer provides a comprehensive due


diligence list, usually quite long. Lists with over 100 items are the norm, not the exception. But don’t just email a bunch of documents and think that your job is done. In addition to providing the data, your two key tasks are to explain the data and to ensure that the data are accurate and consistent. Finally, you — or your advisors — need to ensure that the process is prompt and systematic.

First, put yourself in the mind of your buyer. You’ve lived in your business for years and can look at your key management reports and immediately understand what they mean. The buyer, even if a direct competitor, knows relatively little about your company and how you run it. The easier you make it for them to understand your company, the better your chances of closing the deal.

Second, you must provide accurate and consistent data — and put processes in place to ensure that the data remain accurate and consistent. Let’s say you track the sales pipeline in a CRM or spreadsheet, but your sales team has been running fast and hard and has not kept their prospects updated. Imminent deals show up as low probability and lost opportunities are still shown as potential sales. You need to get your sales team to provide the latest pipeline estimates, so you can provide the correct data to the buyer. Then, until the transaction is finalized, you must continue to use that process and keep the data updated. Due diligence always takes longer than expected. The time to clean up the process and not just the document is always well spent.

One word of warning: never make things up. Don’t expect a buyer to not see through it. Transparency is key. You’ve built trust with your buyer to get this far. Don’t lose it now by pretending to be something you aren’t. If uncovered prior to the deal closing, the deal will almost certainly fall apart. If uncovered after the deal closes, it could lead to litigation.

Keeping all key documents that a buyer would typically request readily at hand before you start the process of selling your company is a great practice. Ideally you should start to work with your banker and other advisors a year or more before you sell to put processes and documentation in place. That process will include implementing a robust virtual data room (VDR) which provides a higher level of security for your sensitive corporate data and also tracks when and how the buyer is accessing the material.

We’ve both been entrepreneurs before we were bankers, so we understand that your skill lies in running a business — not in organizing documents. This is why it pays to have your advisors manage the due diligence process. Also, a banker can sit in place of the buyer and provide perspective on what’s standard for your industry.

Being prepared in advance and having advisors who can run the process will not only make due diligence faster, it will get you a higher offer to begin with, and increase the probability of a successful close.

Jon Rubin is the managing partner at Westbury Group in Westport, Connecticut. He can be reached at 203-745-0272 or jrubin@westburygroup.com. Ted Yang is the managing director at Westbury Group. He can be contacted at 203-803-4470 or ted@westburygroup.com.

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