We’re talking more and more with sellers about the importance of pre due diligence. This means taking the time to do some real investigation into your business before you sell. It’s an investment in time and money, but it can yield dividends in the purchase price.
When it comes to due diligence, most people think about financials because those are the most scrutinized. From the quality of earnings report, to margin by product line, to industry benchmarking—it’s all important analysis.
But there are other pieces of the puzzle that will make your business saleable or not. You need to extend your M&A due diligence to include other key categories like human resources, digital, supply chain, management strength, safety, and culture.
Human resources: Before acquiring your business, a buyer needs assurances that your HR practices comply with all applicable regulations and best practices.
A colleague of mine in the Carolinas was selling a large landscaping business with more than 300 employees. This business had a large (household name) corporate customer who had already done their own vetting of the landscaper’s talent practices. Knowing that, my colleague figured the business would sail through the buyer’s HR due diligence.
As it turns out, the buyer’s investigation revealed that nearly 40 to 50 percent of the landscaper’s employees did not have legal authorization to work in the United States. The strategic buyer, who had been offering a very strong value, immediately walked away from the deal. Ultimately, the sellers had to take their business off the market in order to shore up their employment practices.
Proper compliance is not the only issue, are you adhering to best practices. Up-to-date employee manuals, executed non-compete agreements that apply to the current laws among other items.
Nearly every business owner we talk to these days shares how hard it is to find good employees. Human capital is a big part of what buyers are looking for right now, so you want to be sure you’ve got this portion of your business buttoned up and in order.
Safety: Safety is just one of many cultural issues that can affect a sale. I had a client in North Dakota doing $15 million-plus in sales. It was a good business, but when it came to safety they were only really doing the minimum they needed for compliance.
Unfortunately, a tragic accident resulted in an employee death while the business was on the market. All the interested buyers backed off. No one wanted to take on the aftermath of that kind of tragedy.
I don’t know if a stronger safety program would have prevented the accident or not. But I do know that buyers care about risk, and that means they care about safety.
If the buyer has a strong safety program and you don’t, they know they’re looking at some significant cultural hurdles after acquisition. People will grumble when they suddenly have to start attending safety talks, or taking extra steps to get the job done, or wearing gear they feel is uncomfortable.
Digital: In today’s digital world, every business will be affected by how well they embrace technology and protect themselves against digital theft. Buyers are taking a closer look at a seller’s IT infrastructure, including hardware, software, and digital security efforts. They’re also looking for places where better use of IT could increase sales or where a seller’s niche IT expertise could enhance their own operations.
Do you have all the right licenses for the software you’re using? What sort of vulnerabilities do you have with your data? How much damage could occur in the event of a breach? Are you staying in front of new privacy legislation like Europe’s GDPR regulations and California’s consumer privacy act?
Due diligence is far more than it used to be. Your financials are only one aspect of your business’s overall health. Buyers will continue to scrutinize your financials. But more and more, they’re focusing on the digital and human factors that could introduce significant risk or, alternately, lead to significant returns.
As a seller, that means you need to put greater emphasis on your talent, safety, and risk management processes. Pre due diligence is your opportunity to identify and address red flags, before it’s too late.
Once you know your weaknesses, you can decide if and how to address them in a sale. You can remedy the issues before going to market, or you can be up front about these opportunities for improvement.
Whatever you do, you don’t want to uncover any skeletons mid-way through negotiations. Early transparency will give you valuable credibility. But last-minute surprises can damage your value or tank the whole sale.
