How to Do Due Diligence

How to Do Due Diligence

by | Oct 3, 2013 | Advice

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PICTURE THIS SCENARIO:
An investor approaches a business owner with an attractive offer to buy the business. There is an initial meeting and general deal points are discussed. A rough outline of the terms is sketched out on the proverbial napkin and the parties shake hands leaving the owner thinking they have a deal subject only to a few details to be worked out.

DUE DILIGENCE
Then the investor starts with due diligence. It begins with a few questions trickling in. Then the first round of answers leads to new questions, and the trickle turns into a stream, and then a torrent. Spending so much time responding to questions diverts the company management away from its primary responsibilities. The investor becomes frustrated with the delayed responses and with the incomplete or contradictory information. The owner is frustrated by the amount of time and effort that is being used and may perceive the questions as signaling lack of trust or commitment from the buyer.

If the buyer is serious and likes the responses to the initial questions, then a team of advisors, including lawyers, CPAs and auditors, may come in for an even more comprehensive set of demands for information. The company undergoes even greater stress, and tensions increase. Under these circumstances, it is not unusual for negotiations to break down, and what could have been a good deal turns into no deal at all.

AFTER THE PROVISIONAL OFFER
Most due diligence is done after a potential buyer makes a provisional offer. The due diligence process then begins, often with a very short timeframe for the seller to respond.

A COMPLEX TRANSACTION
Selling a business involves a potentially complex transaction or series of related transactions. Unlike the sale of say, commercial real estate, selling a business involves significantly greater advance planning and hard work ahead of time for the seller. In the next series of posts, we’ll discuss some steps that sellers can take beforehand to make the due diligence process a little easier to navigate.

Keep it in the Family Part 2 – Tips for Succession Planning

Keep it in the Family Part 2 – Tips for Succession Planning

by | May 9, 2013 | Advice

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1. Think out loud
Creating a succession plan as a fait accompli is rarely a good idea. There are simply too many misunderstandings, assumptions, and interpersonal dynamics that can thwart the best laid plans if you don’t communicate your ideas early and often.

2. Equality is a myth
While “share and share alike” is a good idea in theory, not every child is equipped with the same drive and talent to run your business. It may be fairer for the successor(s) you have chosen to have a larger share of ownership than family members who will be passive owners. Or it may be best to transfer management and ownership to your chosen successor and make other financial arrangements to benefit your other children.

3. Invest in training time
Your family business succession plan will have a much better chance of success if you work with your successor(s) for a year or two before you hand over the reins. For solo entrepreneurs, sharing decision making and teaching business skills to someone else can be difficult, but the effort can pay big dividends.

4. Get outside help
It can take a village to sell a business. Most owners will benefit from engaging their CPA, estate planning attorney, business attorney, and financial advisor in the planning stage. There are also companies such as PragmaVentures, Inc. and Codiligent, LLC, which specialize in business succession planning and who can help owners work through difficult issues.

5. Start early
If you want to keep your business in the family, procrastination is a bad idea. Many business succession experts suggest a minimum of three to five years advance planning. A good succession plan can ensure that you will have the funds needed to retire and that the company you have built will thrive in the hands of the next generation.