By Scott Bushkie
According to Q1 2016 Market Pulse survey I help coordinate through the IBBA and M&A Source, businesses in Main Street and the lower middle market are taking about nine months to close. New this survey, we asked how much time was taken up in due diligence, specifically what was the time frame from letter of intent to close?
For the smallest deals with a value of less than $500,000, due diligence takes two months. In most other market sectors, due diligence averaged 90 days.
Bait and switch. If you’re selling a business and a buyer promises they can close in 30 days, beware. This is typically too good be a true and may be a ploy to win exclusivity. Once you’ve accepted their letter of intent, the buyer may start dragging their feet until all the other parties have solidly moved on to other deals. That’s when your buyer starts finding problems and trying to renegotiate the deal.
When we’re working with experienced buyers who make multiple acquisitions, we can do a little due diligence to protect against shady strategies like that. We’ll reach out to other companies the buyer has purchased to ask about the process.
How long did the deal take? Did they miss deadlines? Did they try to renegotiate the price at the eleventh hour? All it takes is three or four phone calls to understand their MO.
Record time is possible. That said, if you’re a well-organized buyer and your team is ready to go, you could win some deals by promising to move fast. Selling a business is an emotional process and once a business owner makes that decision, they typically want to sell as quickly as possible.
The fact is, rapid closings can be done if both sides are ready and committed to the process. Our all-time record was four days. (The buyer had a meeting with his tax advisor four days before his fiscal year end, and the advisor recommend he purchase something big to drive down his tax liability.)
The buyer came into negotiations late and offered a premium at a better structure than others buyers were offering, if we could close in time. His attorney was on standby and he had cash at the ready.
Fortunately, our client was also ready and had a full transition team in place. We got the deal done, earning him an extra $1 million on a $7 million transaction. But it never could have happened if everyone hadn’t been prepared.
Ready to sell. An organized seller will help move a sale through due diligence. Here’s how to help things along:
- Have quality financial reporting. Financial due diligence typically takes the longest, but having audited statements for your last three years will go a long way toward streamlining the process.
- Prepare a specialized team. Make sure your attorney, your accountant, and any other advisors are M&A specialists. What’s more, make sure they’re deal makers, not deal breakers. Some attorneys try so hard to protect their client from every possible eventuality, they go beyond what’s reasonable and customary and eventually the seller walks away from the stress of it all. Deal breakers will point out every potential obstacle to getting a deal done, but deal makers bring their experience and knowledge to bear to solve any issues at the table. We saw this happen to a buyer when his attorney missed several deadlines before berating our seller’s own legal counsel. That buyer truly lost out on his dream business because his attorney was too difficult to work with. But he did get a $30,000 legal bill as a consolation prize.
- Gather info up front. Your advisor should have a pretty good idea of what buyers will request in due diligence. Get their list and start working through it early. Ask your advisor about a virtual data room, so key information is instantly available to the buyer and their advisory team.
- Start with good communication. I’m a big believer in starting due diligence with an “all hands on deck” meeting. Just like the Packers script their first several plays, we lay out who’s responsible for what, according to set deadlines. Get people working off small deadlines and hold them accountable.
Above all, be flexible. The more flexible you can be, the easier it is for your advisors to bridge any valuation gaps and focus on your real goals. You’re not going to win every point, so decide what’s important to you and then be willing to give a little on the other points of negotiation.