Managing Due Diligence: A Key to Closing More Deals
The Sunbelt Business Brokers Franchisee in Las Vegas
Contact Len Krick, MBA, CBI, M&AMI | About The Author
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We all know that business brokerage is a "numbers game." That is, we start with mass marketing, convert leads into a listing meeting, a listing, an offer, and if we are lucky, a closing. Each step along the way, some of our efforts bear no fruit, wasting the Business Broker's precious time. Therefore, it is in the Client's and our best interest to find ways to increase the chances of a business closing.
Importance of Due Diligence
Although there are no reliable statistics, it is estimated that as many as fifty percent of all business transactions which make it to the LOI/accepted offer stage, fail during the Buyer's due diligence (DD). DD is a crucial element that occurs, to varying degrees, in every business transaction. This article outlines some basic guidelines on managing DD.
Business Broker's Role
You (the Business Broker) do not conduct the DD for the Buyer. As the team drives towards the end zone (i.e. a closing), you act as quarterback, directing it and making sure that the DD process stays on course. You must anticipate any impediments to closing as early in the process as possible, and begin to plan how to overcome those DD obstacles. Your job is to control the DD process, and manage those tasks that are the responsibility of others in the process. These are the two keys to closing more deals.
Educate the Seller
At the initial listing meeting, it is essential to begin educating the Seller, and managing his/her expectations. At that initial meeting, you should:
- Describe the selling process, when DD occurs, and its purpose.
- Discuss what Buyers will want to see, and the downside when a Buyer discovers that things disclosed about the business were enhanced/puffed, or that there are missing documents.
- Give the Seller an idea of what will be required; show them a typical list of DD items the Buyer will be requesting, and get a sense of whether the requisite documents are available for the business.
- Do all of this before you take the listing.
After listing the business, collect as many of the documents that will be required during DD as possible; why wait? These documents are typically the same things you should have in your file anyway. They are required to write the Business Summary, Confidential Memorandum, or Teaser.
Educate the First-Time Buyer
It is just as essential to educate First-Time Buyers about DD:
- Inform the Buyer about the process, and that DD is for their benefit.
- Give them a typical DD checklist, but make certain to disclaim it as an "example" and "not meant to be complete or appropriate for any specific business."
- Discuss the time required for DD.
- Give them that "warm" feeling that they will be able to review everything to their complete satisfaction, before they commit to the purchase.
- Talk about obtaining professional assistance; the Seller and the Broker are not the Buyer's advisors.
Include a Due Diligence Checklist in the Asset Purchase Agreement
Have the Buyer include the items on their DD checklist, which they plan to use in the Asset Purchase Agreement (APA). Although the APA often includes a blanket statement that the purchase is "subject to the Buyer's inspection of, and complete satisfaction with, the business records," it is a good practice to include the major items the Buyer expects to review in the APA. The objective here is to avoid surprises; neither side should claim that they "didn't know" that something was asked for or should be done during DD.
Include a Due Diligence Timeline in the Asset Purchase Agreement
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Len Krick, MBA, is the Managing Member and Principal Broker of United Business Brokers of Nevada, LLC; a nine-member office based in Las Vegas, NV, which concentrates on businesses with EBITDA less than $1 million annually. He is also Managing Director of United Mergers & Acquisitions; an eleven-member team based in Salt Lake City, UT, which concentrates on businesses with EBITDA over $1 million annually. Len has over twenty-five years' experience with both privately held and publicly traded companies, which includes: consulting, negotiating, turnarounds, bond and initial public offerings, operations, development, general business brokerage, and small and mid-cap mergers and acquisitions. Mr. Krick has exceptional expertise in operational analysis, business planning, and packaging businesses for sale. Len frequently serves as a moderator and speaker at the International Business Brokers Association conventions. He is a Certified Business Intermediary ("CBI"), Merger & Acquisition Master Intermediary (M&AMI"), Certified Machinery and Equipment Appraiser ("CMEA"), and is the Sunbelt Business Brokers franchisee for Clark County, NV. United Business Brokers' website is www.unitedbusinessbrokers.com. United Mergers & Acquisitions' website is www.unitedmanda.com. Mr. Krick can be reached at 702.364.2589 or len@unitedbusinessbrokers.com. |