There’s no doubting that 2019 was a strong year for M&A activity.
Our team at Generational Group benefited from the strength of the current seller’s market, once again ranking #1 for deals closed worth up to $25 million, and #2 for deals up to $100 million. And more insights into this active year have been spotlighted in Deloitte’s U.S. M&A Trends 2020 report.
Taking insight from 1,000 executives across the U.S., Deloitte’s report presented several important points about the current M&A landscape and what we can expect moving forward, including:
- 63% of respondents believe transaction activity will rise in 2020
- Dealmakers are shifting their attention primarily to the domestic market due to concerns over trade instability
- Corporations and private equity firms have access to record-setting capital reserves
- Focus is changing from large (mega) deals and is more interested in deals within the middle market
All of these factors should give business owners contemplating their exit plans confidence that they can secure an optimal offer for their company in 2020. At the same time, it reminds us that this market won’t last forever, so it pays dividends to start planning while the market is still in favor of sellers.
Due Diligence Delays?
But, the area of Deloitte’s report I’d like to focus on in this article is the insight they offered into due diligence. Their findings revealed that 47% of executives believe the due diligence process is now longer compared to five years ago.
According to Deloitte:
“Gartner says the average time to close an M&A deal has risen more than 30 percent in the past decade.” This development may be related to the greater complexity of deals, or it may be rooted in where we are, well into a long M&A cycle, which makes it harder to find good deals. Regulatory and policy uncertainties, along with information security concerns, may also play roles in extending the due diligence phase.
If you’ve never been through M&A due diligence before, in some ways I envy you. This is the 2-3 month period where prospective buyers meticulously assess a company that they’re interested in, to reassure them that:
- The information the seller presented to them in their Offering Memorandum was correct; and
- There is no great risk involved in acquiring/investing into the company in question.
Risk is a word buyers want to avoid in all circumstances. Due diligence is there to uncover and evaluate any areas where this is present. And, naturally, this means this is the period of the exit journey where negotiations are most likely to collapse for a variety of reasons.
The seller may become fatigued about the unceasing questions and discussions with the potential buyers. Or a buyer could find inconsistencies in their findings from the documentation they were provided by the seller, leading to a break down in trust.
In Deloitte’s report, they have highlighted that the increased complexity of deals and trying to juggle multiple buyers at once have caused the speed of this process to falter in recent years. But why exactly is due diligence such a marathon to contend with?
The Due Diligence Checklist
When discussing due diligence, I’m always reminded of a long-established turn of phrase:
A deal isn’t really a deal until it falls apart at least twice!
At Generational Equity, navigating the potentially treacherous waters of due diligence is something we’ve become adept to over the years. While no two M&A transactions are alike, this experience is invaluable to anticipating what issues a prospective buyer may have and how to respond to these to keep a deal on track.
Still, without a clear understanding of where the typical 200-300 due diligence questions will come from, exiting business owners can easily find themselves at loggerheads with buyers.
Areas that will be interrogated during due diligence include:
- General Company Information – what is your company all about?
- Financial Matters – how healthy is your business financially?
- Products & Services – what is your company’s offering?
- Property – what property does your organization own or lease?
- Customers & Revenue Streams – how diverse and wide is your customer base?
- Technology & Intellectual Property – what tangible and intangible assets do you have rights to?
- Strategic & Cultural Fits – are your strategies in line with the buyer?
- Employee Information – what are the skills and overall quality of your existing team?
- Material Contracts – what contracts and other commitments do your company hold?
- Tax Matters – is your company at risk of litigation or liabilities related to tax?
- Insurance Coverage – how protected is your company through its insurance?
- Antitrust & Regulatory Issues – has your company been under investigation for any antitrust problems in the past?
- Cybersecurity – does your business have robust IT defenses and support?
- Environmental Factors – is your company’s impact on the environment positive or negative?
This is just an overview of what you can anticipate from due diligence, which makes it no wonder that this already exhaustive process has gotten longer and longer over the years. So, when you want to ensure your exit is as smooth and streamlined as possible, what steps can you take to minimize the time it takes to complete this task?
Ways to Streamline the Due Diligence Process
Don’t mislead buyers in your documentation
First and foremost, be honest and accurate in the documentation you present your potential buyers.
While it is encouraged to recast your financials to provide a true reflection of your potential to buyers, flat out lying or subverting details is a real deal-breaker – buyers will find the discrepancies and call you out. This may lead to a loss in trust, resulting in a reduced offer from the buyer, or negotiations coming to a halt altogether.
Stay organized with documents and checklists
Collating and updating your core information in your Offering Memorandum is a painstaking process, but it saves a lot of time and headaches during due diligence.
If information is incomplete or missing, buyers won’t simply shrug and move on – they’ll do what they must to get a clear picture of your company. So starting early in collecting this data will likely reduce the time a buyer takes to understand your proposition.
Be prepared to answer and address risks
No matter how thoroughly and organized you have been in the build-up to this part of the exit process, due diligence will raise questions that you will need to answer about your company.
Preparation is everything at this stage of exiting a company – undergo internal checks to get a clearer idea of what queries your company might inspire, and identify any areas of risk so they can be addressed and remedied before potential buyers bring them to the table.
Work with a professional M&A firm
Finally and arguably most importantly, don’t go into the due diligence process alone. Our team at Generational Equity have estimated it can take at least 1,000 hours of your time to go from marketing your company to closing a transaction – much of it spent in due diligence.
Working with an M&A firm will mean you’re backed by people experienced in navigating this process, so you avoid any pitfalls, are kept focused during testing periods, and ensure any areas of risk are dealt with prior to buyers conducting their checks. It’s a tough road, but it’s easier to walk with someone alongside you.
In addition, the first phase in the Generational process is a thorough and complete evaluation of your business – a “mini” due diligence. This step is critical because we ferret out many issues that need to be addressed long before due diligence is started. This is one reason why we are one of the leading middle market M&A firms; buyers have confidence that when we bring them deals that we have done our own due diligence.
Approach Due Diligence with Confidence
As the due diligence process becomes more in-depth and comprehensive, knowing what to expect and having an experienced team by your side is crucial to making this difficult portion of the exit process as efficient and well-managed as possible.
Hopefully this has provided a deeper understanding so you can approach your exit with more assurance. If you’d like to learn more about what’s involved in due diligence, there are numerous articles on this topic in Generational Equity’s regularly updated insights.
