It may be every small business owner’s dream: attract the attention of a major company and get acquired for millions of dollars. But before too many dollar signs start dancing in owners’ heads, they need to take some critical steps, or else their business dreams could easily turn into nightmares.
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It may be every small business owner’s dream: attract the attention of a major company and get acquired for millions of dollars. But before too many dollar signs start dancing in owners’ heads, they need to take some critical steps, or else their business dreams could easily turn into nightmares.
The first step in every merger or acquisition is due diligence: conducting a comprehensive appraisal of a business to evaluate its commercial potential. It may sound deadly boring, but skimping on tedious financial or legal work could result in a less lucrative deal. It’s not that different from preparing a house for sale: cleaning and staging it will often fetch a much higher price. I’ve worked on hundreds of mergers and acquisitions and have witnessed the importance of due diligence. I’ve seen deals fall apart completely because records were too messy, while others went for a premium because of companies’ meticulous books.
Owners should start looking at their books and records as soon as they know they are going to market, since this process can take much longer than expected. They should go above and beyond the minimum financial requirements. That means complying with generally accepted accounting principles or international business standards. Owners need to make sure they have three full years of records, complete with balance sheets, income statements, and statements of cash flows. They should have up-to-date inventory reports, too, as well as future forecasts, growth trends, and lists of short- and long-term debts. Collection rates, bad debt, and taxes all need to be in order, too. It’s often wise to conduct a self-audit to find any hidden liabilities.
There are a host of legal niceties as well. Most private companies forget the importance of corporate formalities and do not keep up-to-date with bylaws, stock ledgers, or annual reports. They need to remember many changes within the company, such as a 401(k) change or a newly appointed officer, trigger the need for board approval. Without following such formalities, securing a great deal could be more challenging.
Understand any judgments, outstanding litigation, or potential litigation and be able to explain how risk could be mitigated. It may be worthwhile to consider a self-audit of licensures and regulatory compliance. When I represented a healthcare company that hadn’t sent appropriate notices about closing some facilities, the buyer held back several million to mitigate the risk of non-compliance.
If that weren’t enough, contractual obligations need to be examined carefully, too. Businesses must make sure they have executed complete copies of their top 20 customer and supplier agreements, including any employee contracts. They should look for clauses posing future legal obligations, such as penalties for early termination.
While it may seem like a hassle to do all this work before formal due diligence starts in a merger, the time owners invest in these tasks will boost their chances of snagging the deal of their dreams.
