6 Ways to Boost Due Diligence & Maximize the Value of Your Deal24 July, 2015
In today’s robust economic climate of mergers, acquisitions, private equity and venture-backed investment activity, many businesses, at some point in their life cycle, can expect to be put under the due diligence microscope.
At ShareVault we’ve facilitated thousands of transactions worth tens of billions of dollars in 46 countries and we’ve learned through experience that the speed and effectiveness of the due diligence process can have a direct impact on deal success and valuation.
Here are our top six best practices for streamlining the due diligence process and maximizing the value of your deal:1. Set up a virtual data room
When a potential buyer begins the due diligence process, they’re not only trying to get to know you and your asset in greater detail, but they’re also attempting to verify what they’ve been told and confirm that your data is accurate. They’re also attempting to understand all of the relevant issues and estimate the potential value of your company, as well as its obligations and risks. The best way to present this information is in a well-organized virtual data room, or VDR.
To maximize deal success and valuation, it is highly recommended that you have a virtual data room up and ready in advance of the potential buyer showing interest. It not only increases deal momentum, but also makes you look more professional.
A data room can even cause the buyer to believe they are facing competition for your company’s acquisition, further increasing your company’s value and the speed of the process.
A good virtual data room is completely secure and wholly customizable so that all your financials, employee records, IP and contracts—everything the buyer will want to see—are easily accessible, and only accessible to the individuals of your choosing throughout the deal process.
A VDR’s permissioning feature allows an administrator to quickly define for each document or group of documents the users or groups that have access to those documents. For instance, legal documentation might only be granted to a firm’s corporate counsel, while employee records might only be granted to HR.
A virtual data room also allows for staging the sharing of the most sensitive information until it becomes clear that the parties involved are serious enough to need to see that information.2. Scrutinize your business from the outside in
What is a potential acquirer looking for when they approach your company? What will be the focus of their due diligence?
While it’s generally true that tech companies are bought, not sold, it’s also true that the buyer must first be attracted to your company. Companies like Google, Cisco and VMware, as well as many others, look at thousands of potential opportunities a year. In such a competitive market, the question becomes: How do you effectively differentiate your product, your company and your opportunity to stand out from the crowd?
Your team should start by taking an “external view” of your company—scrutinize what the buyer will scrutinize—and then remediate any weaknesses, issues or liabilities long before a buyer even comes along. Consider conducting a formal audit. Remember, if something raises a red flag for you, it will certainly raise a red flag for a potential buyer.3. Be prepared to validate your business to the buyer
In all M&A deals there will be a sponsor at the buying company whose job is to create a business case for buying your company. If you don’t understand that business case, and if you can’t assist that internal sponsor in developing that case and presenting it to their support team, then the deal will likely never get off the ground.
It is crucial that you understand your company’s value in the hands of a potential buyer. Why should they buy you? What are the synergies your company will bring to theirs? Do you have counter arguments for why the buyer may not think you’re a good fit? Once you understand the value that you’re bringing to the table, ensure that your team is in agreement concerning that value and that they are able to help the buyer articulate that value.4. Clean up unresolved litigation
Are there potential lawsuits or litigations that could surface during due diligence or after the deal is announced? It’s not uncommon for the due diligence process to reveal litigation exposure that the owners of the selling company were not even aware existed.
These exposures could relate to IP, customers, former or current employees or even company practices that are no longer in use. Don’t fool yourself: If your company is facing any real or potential lawsuits they will be exposed during the due diligence process.
Unresolved litigation will reduce deal value at close or from escrow and should be dealt with well before a buyer shows interest.5. Practice good HR hygiene
What are the HR issues that are most likely to kill a deal? Most due diligence teams will tell you that the biggest red flag for them is when questionable ethics are uncovered during due diligence on human resources.
These can involve harassments, falsification of employee data, inaccuracies on public filings or flagrant violations on contracts. Usually when one issue is uncovered it signals the due diligence team that there are probably other issues out there, inciting them to start digging deeper than they otherwise would. For most big acquirers ethical lapses are simply not tolerated. This is the number one HR issue that will chill, if not completely kill, a deal. So, practice good hygiene. Build a solid foundation for your company and keep it clean.6. Consider a transaction readiness service
To fully prepare for the scrutiny a potential buyer will exact on your company you may also want to consider employing a transaction readiness service. These services assess your company for major M&A risk factors and recommend a course of remedial action. Typically, the assessment will consist of interviews with the CEO, the CFO and any other key stakeholders that have sufficient knowledge of operations, strategy, financial performance and value proposition. They will then return with a proprietary analytical overview of your company and identify the areas that require remediation.
Today’s buyers are ruthless when it comes to due diligence, so it’s imperative when entering into a potential transaction to be organized, thorough, and to ensure that nothing the buyer might be interested in seeing is inaccurate, missing or unresolved.
To learn more about how to maximize the value of a deal, download the below white paper on The Art and Science of a High M&A Valuation: