When you engage investment bankers to sell your company, the first undertaking by them should be a due diligence of your company. This article explains why this due diligence is necessary and the advantages to you when due diligence is performed properly.
You might very well ask why investment bankers need to perform due diligence, thinking that due diligence is the purview of the potential buyer and comes at the end of the process. The due diligence performed by your bankers serves several purposes that all coalesce to a single objective, obtaining the highest possible valuation for your company.
The due diligence effort will help your bankers prepare a compelling and accurate Offering Memorandum. The Offering Memorandum is a summary of your business and is the first impression that potential buyers have of your company. It is a marketing document as well as a business document. It will give potential buyers an insight and understanding of your business. They will be able to assess how you are doing, where you are going and describe your business, operations and management. Based on the OM, potential buyers will decide whether or not to submit a formal offer. Therefore, all information that is disclosed in the Offering Memorandum needs to be accurate and documented. You can see that a lot rides on this document. Your bankers need to know what information is required, what questions to ask and how to help position your company in the best possible light while accurately reflecting your company.
This due diligence process is a dress rehearsal for the due diligence that will be performed by the potential buyer. While not all information about your company will be included in the OM, (i.e. by-laws, severance agreements, legal agreements, etc), it will most likely be requested during the Buyer’s due diligence. Therefore, early organization of the paperwork not only allows you to be prepared as events begin to accelerate, but develop any needed explanations should they be necessary.
As you are gathering information, you will be engaging in conversations about the information with your bankers. This process will prepare you for the buyer’s questions during their due diligence process as well as the management presentations.
Lastly, your bankers’ reputation is on the line. When they sign on to represent you, they are telling the potential buyer that they have prepared and reviewed all the material. If after the buyer due diligence, there are major discrepancies, the company will not appreciative that their time has been wasted and will not look kindly on your bankers.
As painful as due diligence is, it is the first and necessary step in obtaining the best possible valuation for you. Our clients have actually learned something about their own business during this process. To us, that is proof enough that this is an important and often misunderstood step in the sale process.