Where do most business owners lack in preparation for due diligence?

by a professional from Western University

1 year ago

Hi all, I am trying to develop tools/resources to help small business owners prepare for the sale of their business. Any thoughts on which areas I should focus on (e.g., legal, financials, structure)?

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searcher from University of Notre Dame - Mendoza College of Business

Hi Dylan - I'm sure there are threads on this site that would have helpful info, but I'd also take a look at the Stanford search fund primer (below link). There's content in the primer on diligence but there are also helpful exhibits referenced (i.e. Exhibit 15: DD request list, Exhibit 25 DD topics). The diligence request lists (DRL) are pretty standard and as a seller preparing for DD, I'd look at a template before a sale process starts and start aggregating, inventorying, and reviewing the underlying data. The DRL will encompass all elements of DD beyond just a few focal areas - I think first time sellers, especially those of a small business, are typically pretty shocked to see the amount of info requested by a buyer. Ensuring the small business owner is aware of standard DD scope and aggregating info to understand where gaps are prior to any DD process starting would be a prudent practice. A small business doing this during exclusivity (vs. weeks before) would be a chaotic process.

I have less experience with small businesses, but financial DD prep is always important, particularly for the forecast (not typically in scope for QofE type financial DD but clearly critical). The seller is going to want to have a reasonable forecast, a convincing story about that forecast, and be knowledgeable of the the drivers underlying the forecast as they'll be speaking to it. The process of building a forecast is also a good exercise to help aggregate critical diligence items that go into DD prep (historical P&L, FTE data, sales data, pricing, etc.).

Legal diligence is less a focus of the seller themselves and typically involves outside counsel. Also, structure will be addressed through the LOI, but may be renegotiated/refined during DD. One critical component (of numerous) to the asset vs stock sale though is whether key contracts can be assigned - having that insight up front would be helpful.

Search Fund Primer:
https://www.gsb.stanford.edu/experience/about/centers-institutes/ces/research/search-funds/primer

1 year ago | like reply | 1 like

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