Due Diligence Archives

Components of Corporate Due Diligence

April 22, 2020 by Ellen Park

In the world of Corporate M&A, well planned sale processes have typically done an internal due diligence review before hitting the market. For instance, management presentations should be vetted, data rooms populated, and accounting and legal advisors fully engaged. While every deal presents some surprises during the diligence process, sophisticated sellers should have gone the extra mile to help minimize them.

Most due diligence can be broken up into two sections: Compliance and Value Drivers

Compliance:

Compliance issues are typically the most difficult to overcome. For instance, issues related to environmental, legal or regulatory concerns. Any finding as part of the compliance review will typically cause a material delay in the process and increase deal costs for both buyer and seller. For buy-side diligence, try completing the compliance review early on to minimize total deal costs should an issue arise. And for well-prepared sellers, compliance issues should have been addressed well before going to market.

Value Drivers:

Hopefully, most buyers of these businesses can focus their diligence efforts on key value drivers. Where does the buyer add synergies across every aspect of the business? And many times, how can the best practices of the seller be integrated into the buyer’s business?

Overall, to complete a successful diligence, each Process Owner (e.g., Finance, HR, Operations, etc.) of the diligence should be encouraged to:

Show full completion of their section of the diligence checklist
For identified concerns – detail the remedy and quantify the relevant cost to fix
Suggest synergies and quantify the savings and timing to achieve

Diligence is a complex and detailed process. Fundamentally though, diligence breaks down to issues either related to Compliance or Value Drivers that each Process Owner should have responsibility for identifying and ultimately resolving too.

Sun Acquisitions

Sun Acquisitions is a Chicago based M&A firm specializing in helping businesses confidentially buy and sell privately held firms. Our team is comprised of certified business intermediaries with deep transactional knowledge and experience across a broad range of industries. Our Advisors have experience working on hundreds of due diligences for small and middle market transactions.

Let our team of Advisors and former Corporate Development Professionals help drive your business to the next level. Contact Sun Acquisitions for a free consultation at [email protected].

Top 5 Things Buyers Should Know about Due Diligence

March 6, 2020 by Ellen Park

Are you planning on buying a business?

If you’re an avid investor and someone not too keen on starting a business from the ground up, then purchasing an existing company that’s already profitable could be a great move. However, as attractive as it might appear, the importance of due diligence cannot be overemphasized. Just as you would never think of investing in the stock market without sufficient information or buy a property you haven’t carefully evaluated, the same holds true for buyers anticipating acquiring a business.

So, what are some of the top things buyers should know about due diligence?

What is business buyer due diligence?

As the buyer, the ball is in your court. You’re the one who makes 90% of the calls and ultimately has the final say as to whether the deal proceeds or not. Due diligence on your part involves the careful and thorough verification of all information provided by the seller and that your team collects from different sources. During this stage, a careful assessment is carried out to get a holistic overview of the business you’re intending on acquiring. The onus is on you to find any loopholes, discrepancies and potentially problematic areas in the business you wish to buy.

What to look for when carrying out buyer due diligence

Because businesses consist of so many different parts and entities, a checklist is often used to collect relevant information. This checklist is served to the seller and is basically a request for information about the business. This information includes financial reports, company legal documents, employee specs, operations, company assets, client data as well as particulars on the company’s products and or services. It is worth noting here that because of its complexity, buyer due diligence is a process that should be overseen by a competent business broker, your attorney, and accountant.

Without further ado, here are the five things you must know.

1. Cross-check all financial information

The number one thing you should never do when reviewing financial information you’ve received from the seller is to take what’s presented at face value. Even though everything looks good on paper, your accountant will need to go over the numbers to make sure everything checks out. This can be done in tandem with the seller’s accountant. What documents should be verified? Here are just a few:

Financial statements posted in the last five years.
Tax returns as well as the company’s credit report.
Cash flow statements, income spreadsheets, ledgers and accounts receivables
Associated debts in addition to contingent liabilities
Product inventory, real estate and or company equipment

2. Review business operations and structures

It’s often said that a small leak is what causes great ships to sink. Robert Kiyosaki once said, “For a business to survive and thrive, 100% of the systems must be functioning and accountable. It’s not the systems that you know about that are the problem – it’s the systems you are not aware of that cause you to crash.” With that said, part of your buyer due diligence should involve a careful and deliberate analysis of the business’ structure, operations and systems. Metrics such as market penetration, industry trends, current competitors, customer base and operational costs are just part of the systems that need to be evaluated.

3. Enquire as to the existing contracts in place

Are there any contracts the business has in place with other companies that you as the buyer need to be aware of? These may be non-disclosure agreements, guarantees, stock purchase contracts, loans, leases, credit lines, mortgages, and or security arrangements. You need to have a comprehensive understanding of any and all of the legal obligations this business is involved in. Because when you acquire the business, you automatically inherit all this responsibility. Your attorney has to go through each of these contracts to ensure that they are all in order.

4. Verify provided customer information

Customers make a business what it is. Who are the biggest customers for the business in question? How often do they do business with this company you’re intending on buying? Is there a set protocol for acquiring clients? The seller should furnish you with all relevant customer databases as well as sale records. Communication and correspondence should also be availed to you as the buyer. Any ongoing litigation or legal cases should be highlighted and drawn to your lawyer’s attention. In this section of the checklist, we’ll include making sure the business has all the relevant professional licenses in place.

5. Don’t overlook the company culture

Company culture is such a pivotal issue that merits its own due diligence. Company culture cannot be overlooked especially in mergers and acquisitions because of its critical role in the success of the acquisition. People are not pawns that can be moved as you please. Both buyer and seller have a responsibility to employees on both sides of the spectra of being transparent and letting them know what’s happening. As a buyer, you’ll have to review employee packages, benefits, and incentives. At the right time, you’ll be given access to sensitive employee information such as tax forms, contracts, and payroll information.

Don’t navigate these waters alone

Due diligence can be a taxing affair. Fortunately, you don’t have to navigate the dangerous waters alone. Because of its legal complexity, it is preferable to bring on board a business broker that’s familiar with mergers and acquisitions. The team of Business Brokers at Sun Acquisitions have decades worth of experience and have been helping buyers and sellers close deals amicably. Together with your lawyer and accountant, you’ll be in a better position to discuss your concerns and find solutions for a way forward.

Top 5 Things Sellers Should Know about Due Diligence

February 26, 2020 by Ellen Park

Are you thinking of selling your business?

In 2018, 10,312 small businesses were purchased in the United States, and in the past 5 years, the number of business sales has been on the rise. Good news for owners looking to sell their businesses, however before a business transaction, extensive due diligence is carried out by both seller and buyer. During a business sale, due diligence is a rigorous process with the intent to establish the history, health, and viability of the business offered for sale. It’s not a one-sided affair; both parties involved in the transaction have their own interests to consider. So, we’re going to take a look at a seller’s due diligence and some of the key performance indicators you should look out for.

An overview of business seller due diligence

A business seller’s due diligence will most often begin by knowing the kind of buyers you are interested to attract. Once the target buyer market is established, seller’s representatives perform extensive background checks on interested parties before you start sharing company documents with them. Once all business buyer prerequisites are satisfied, sellers may make initial contact with prospective buyers.

Once initial contact has been made sellers will then receive a list of requirements from the buyer or buyer’s business acquisition advisor. This list may come through the buyer’s law firm or broker. Among the buyer’s requirements, expect to see a request for legal, accounting as well as financial information. While you may have access to all of the necessary documents, a business broker can organize and package the commonly-requested details so you’re ready well in advance of engaging a buyer.

You can submit most of the required documentation through virtual data rooms, reducing printing and postage, additionally making secure information sharing near-immediate. As you prepare your business for sale, consider these tips to prepare you and the business for seller-side due diligence.

1. Ensure your company’s papers are in order

With over 30 million small businesses in operation across the United States today, providing employment to 47.8% of the country’s workforce. Your business may not be the only one that prospective buyers are looking at. When selling a business having your papers in order can ensure a faster transaction.

Provide the buyer with the required documentation they need in order to make informed decisions. Remember, hiding things will only put buyers off and more often than not, the truth will come out. Also—and this is big—be sure that Non-Disclosure Agreements (NDA) have been signed prior to sharing information.

2. Bringing a professional onboard can be helpful

Mergers and acquisitions are not a walk in the park. They can quickly become messy and complex, demanding a lot from both the buyer and seller. As the seller, throughout the entire ordeal, you’re still expected to run the business, and because of this, you might not be able to give your attention fully to everything the buyer is requesting. This is where bringing in a business broker who is familiar with the intricacies of M&As becomes useful. Engaging an experienced mergers and acquisitions team provides the experienced counsel regarding the value of the deal or advise you to keep looking for a better offer.

3. Research your buyer and get to know them better

As you conduct your business seller due diligence, ask questions of your prospective buyer: Has this potential buyer closed any deals in the past before? If yes, how smooth were the transactions? How are the businesses they’ve bought fared to date? Answering these questions about potential buyers are particularly important because they can help you weed out the tire-kickers and poorly-matched buyers. Not every buyer who makes an offer proceeds with the transaction, which is why ample buyer research ahead of time will save time and headaches . Remember, that you as the seller are always in control. You don’t have to accept the first offer that’s put on the table. A better buyer may come along.

4. How does the buyer intend to finance the deal

Never take the financial aspect of selling a business for granted. Every detail should be discussed. During business sale negotiations, you will hand your financial papers to the buyer so they can see the company’s financial health. You also have a right to know the buyer’s purchase financing source. It is imperative that all aspects of the deal, including funding source and timeline are put in writing. It is also worth knowing that the first offer you receive doesn’t have to be the one you settle for. If the deal becomes difficult to close or too many red flags or concessions are made on your part, consider pursuing other offers.

5. Understand what the buyer intends to do with the business

There are some buyers who buy businesses in order to merge and grow their current enterprise. There are those who simply purchase businesses so that they eliminate competition in order to dominate an industry. Part of your buyer research should include asking the buyer their intentions with the business, which may influence your decision to sell. Mergers and acquisitions can be stressful for owners, and potentially more so on the employees post-sale, as their role may be changed or eliminated once the new owner takes control. While often not a primary concern, part of your offer consideration should include the future of the workers you hired, trained, and employed to bring the company to the point of sale. An effective business deal includes a healthy transition of ownership or merger between companies to ensure the viability and long-term value of the business being sold.

Get in touch with one of our advisors to learn more about how Sun Acquisitions can help during business mergers and acquisitions.

Disclaimer: Any information provided in this blog is not intended to replace legal, financial or taxation advice given by qualified professionals.

How To Manage The Culture Aspects of a M&A Transaction

February 12, 2020 by Sun Acquisitions

Research shows that 53% of startups in the United States have planned to use an acquisition as their exit strategy. In 2019, there were 348 M&A deals valued between 25 and 49.9 million USD. It’s clear that the U.S. has a strong M&A tradition; however, not every story has a happy ending.

There are numerous reasons behind companies merging or getting acquired. The biggest goal is to achieve a synergetic relationship where the combined entities are more productive and financially sound than the sum of the individual entities. But, it’s no secret that such transactions can end up as disasters if the integration plans are not well thought out and planned. Culture clashes top the list as the leading factors of M&A failures.

So, how should prospective buyers and companies getting acquired manage the culture aspects of their intended M&A transaction?

1. Research extensively before committing to anything

Mergers and acquisitions have been likened to a couple getting married – and with due reason. Before you marry anyone, there should be a significant amount of time spent getting to know the other party. Their likes and dislikes. What makes them tick and what puts them off. Business entities are similar. They have their own unique traits and characteristics. During the due diligence phase of M&A, attention must be paid to each aspect of the company and not just the financials. Whether you’re considering a horizontal, vertical, conglomerate or concentric merger it is imperative that the company as a whole is looked at.

2. Conduct a formal cultural assessment of both companies

The process of due diligence will give a holistic overview of a company. However, this research may not be enough to fully understand and appreciate the core cultures of both entities. For this reason, a separate formal cultural assessment needs to take place. Not only of the company being acquired but also of the entity intending to buy the former. Going back to the marriage analogy, it is preferable for a person to understand who they are first before courting someone else. This increases the chances of a successful relationship. The same holds true for M&As.

3. Appreciate the corporate cultures of both entities

One of the biggest reasons the Daimler Benz and Chrysler M&A dissolved in 2007 after less than 10 years was the failure on both sides to fully appreciate the different core cultures involved. Where Daimler had a more “conservative” culture, Chrysler was all about being “daring” and this led to the two automotive giants being at constant loggerheads with each other.

At times, even when a formal cultural assessment has been conducted, and especially in the event of a hostile takeover, many may be quick to dismiss culture as a minor aspect which can be dealt with later on. However, nothing is further from the truth and this is often reflected when skilled employees begin to leave the company. Thus, it is imperative to understand and appreciate that the corporate cultures of the merging companies are different.

4. Define the objective of the M&A to employees on both ends

M&A can be a trying time for employees because their livelihoods are at stake. When companies merge, there may be significant impacts on personnel. As such, employees are generally emotionally tense during the entire process. This is worsened if there is no clear directive or communication coming from the top.

You cannot expect people to dance to the beat if they are not aware of what’s being discussed and where they stand in the new re-structuring process. You must remember that it’s people who set the tone of a company. It’s the talent in a company that defines its culture. Therefore, if you wish to avoid culture clashes, be clear and define the objective of the M&A and keep your people in the loop of things.

5. Plan for a new corporate culture and inform your employees

In most cases, the end goal of an M&A is to create a new entity that’s stronger and better placed to dominate in the respective industry. A new business should mean a new corporate culture, however things don’t always flow as smoothly, and why is that? Because the dominant company almost always assumes that their corporate culture will be adopted. As highlighted before, culture is defined by people, and people are emotional creatures.

Ideally, a nouveau culture must be created and it ought to be addressed during the M&A process. And it should be a culture that combines aspects of both sides of the company. If people have been doing business in a certain way for decades and then are suddenly told they have to change, it will most certainly take some time to get used to the new culture.

6. Have a clear strategy of how culture clashes will be handled

Pre-marital counseling is often recommended for engaged couples or those considering getting married. These sessions are designed to give the prospective couple an insight into the potential problems they will face within their marriage and also propose solutions of how to handle the disputes and clashes. A similar counseling process is needed for the entities considering an M&A to discuss how problems will be resolved.

There must be clear strategies in place on how culture clashes will be handled. It’s not a matter of if they arise but when such clashes happen, what will be done? Forewarned is forearmed. Take advantage of teams, such as Sun Acquisitions, that help companies find strategic solutions before the need arises. Having such strategies in place will help to diffuse tense situations and facilitate a smoother transition.

Get in touch with one of our friendly advisors to learn more about how Sun Acquisitions can help during business mergers and acquisitions.