Mackenzie Regent, Co-Founder, Kalos LLP
Who Uses Due Diligence .. and WHY?
Looking to raise capital or pursue mergers and acquisitions? Explore who uses due diligence, and more importantly why, below.
1) Buyers or Investors of Companies – aka the “Buy” Side. Financial due diligence is commonly used by individuals, families or companies seeking to acquire all, or a part, of a business before proceeding with an investment. It brings deal experts well versed in accounting, tax and finance to the table to support the buyer throughout the entire process. By having proper financial due diligence done, buyers gain confidence:
That they are making a solid investment;
There are no surprises waiting for them;
That the valuation of synergies makes sense;
That they are aware pf what low-hanging fruit exists in the business to optimize to maximize their investment going forward; and,
That they know what they are going to need to know to operate the business successfully post-close of the deal.
2) Sellers of companies
From above, you know that buying a business is similar to buying a home in that you would want to get a home inspection done, so why would you want to perform due diligence when selling your business? There are several reasons, which we have listed below:
Attract quality investors;
Address issues up-front to build trust and preserve value;
Receive quality offers; and,
Save time and money.
1. Attract quality investors: Having an independent CPA firm’s due diligence report signals you are serious and transaction ready. About 50% of deals don't make it through due diligence and buyers don't want to their waste time or money on a dead deal.
2. Address issues up-front: Having due diligence done early allows you to identify and address issues upfront avoiding surprises. Often, it is not the issue that kills the deal, but that it was not appropriately communicated. Being proactive builds trust enabling you to maximize value by positioning issues well and ultimately reduce the chance of a dead deal.
3. Receive quality offers: Buyers often do their homework after they win the bid when the deal is more serious and at an exclusive stage. This means they are providing an offer based on limited information, which can result in wanting to pay a significantly different price than they initially offered. Providing buyers verified information upfront allows them to make a realistic offer that is less likely to be adjusted down once they bids are over.
4. Save time and money: A due diligence report includes all of the key information buyers are looking for, which saves you the headache of having to answer the same questions from each of the buyers. More importantly, it gives buyers confidence to start a bidding war over your company. Getting ready is the secret to success.
3) Companies Approaching Financiers, Lenders & Investors (and these financiers themselves) Whether you are growing through mergers & acquisitions, or organically, you need to consider how to finance that growth to take advantage of opportunities. Help make the financing process smoother and increase your chances of success with due diligence support. When approaching financiers, design the process to go as smooth as possible as investors and lenders will perform their own financial due diligence process before providing the capital you need. Financial Due Diligence:
Prevents roadblocks by having the ‘Accounting Cleanup’ done ahead of time, ensuring your books are in order and financial information is ready and useable by lenders and investors;
Professionals work directly with owners and management teams to investigate as well as analyze financial data to tell your compelling ‘story’ through timely, analytical and comprehensive data; and,
Issues a report that is independent and objective, giving your company credibility to lenders & investors to complete the raise with confidence and fulfill your deal potential.
Investors & lenders have expectations of companies that want to raise capital. For positive results, ensure you bring a trusted advisor to the table who can help you excel through the process.
4) Financial Sponsors Within the buy side, the buyers who purchase only for financial reasons are known as financial sponsors. As a financial sponsor, you know the devil is in the details and that it takes a ton of work to see a deal close successfully. As financial due diligence professionals, we are here to help get the deal across the finish line. Below are ways a financial due diligence professional helps:
Whether you have an internal due diligence team that needs a hand, or your team needs to focus on other parts of the deal, an external financial due diligence professional can act as an extension of your team to provide the additional horsepower you need;
A financial due diligence professional is engaged as a second set of eyes to ensure that the transaction is a good deal, there are no surprises down the road, and someone who can remain objective is analyzing the deal; and,
Attract quality investors by signaling you follow proper investment process. This process includes requiring an independent CPA firm’s due diligence report go to your board or oversight committee in advance of an investment decision to meet your quality and compliance needs.