Mergers & Acquisitions Advisory

A Neumann & Associates, LLC

November 3, 2019

Be Ready for Due-Diligence!

By Jeremy Albelda

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One of the great “mysteries” in transferring a business is the due-diligence process. Whereas business owners often have a fairly clear concept of a buyer interview and the transfer process, it’s the due-diligence process that makes many of them cringe.

“Business owners are somewhat concerned about due-diligence and providing the most confidential documents to a buyer,” says Achim Neumann, President of A Neumann & Associates, a New Jersey based mergers & acquisitions and business brokerage firm.  “However, the better the upfront preparation or pre  due-diligence, the smoother the ultimate due-diligence by the investor.”

Probably the most important factor is the proper preparation. This includes the assembly of all financial information, the tabulation of operational information, a recap of the market growth/size and competitors and the itemization of human resources. A competent, experienced M&A advisor is absolutely key in helping the owner to compile the information and presenting the business by way of a confidential memorandum in a comprehensive, convincing way to investors.

The underlying preparation needed for compiling the business information will serve to show the business owner and M&A advisor that information is easily obtained and which information is deficient. This is very important with respect to the subsequent due-diligence by an investor once an offer has been submitted. For example, if the business has a poorly operating financial reporting system, MIS improvements need to be made prior to marketing in order to be able to provide up-to-the-minute financial information to a buyer in the due-diligence phase.

Further, every business needs a business valuation from an accredited, third party valuation firm. Without such valuation, buyers will simply discard the asking price and will initiate a “bottom fishing” expedition, wasting a lot of time of the seller and his advisors. A clearly defined and justified asking price will not only avoid such low offers, it will also facilitate an efficient transaction when a buyer contacts his lending source to raise funds – with the lender requiring a quantitative analysis of the business.

With the business valuation and confidential memorandum (sometimes called ‘prospectus’) in place, the business owner has established a base line for an offer by an investor, which will then lead to an offer and the due-diligence process.

Why is the proper preparation and documentation so important? There are significant reasons for such.

First, with a professionally prepared business, the owner himself will feel competent and assured going into any negotiations with a buyer. With a comprehensive confidential memorandum supported by an accredited valuation, the owner can take a firm stand, being proud on his business – as opposed to the owner, who has to spend hours pulling various documents after an investor introduction, with an investor increasingly losing interest in the business. A well-prepared business owner can calmly conduct an investor due-diligence.

Secondly, with a proper documented business, a baseline for an offer has been established, in other words, a buyer can base their offer on the basis of certain underlying presentations. For example, if the confidential memorandum states that a net working capital of $500,000 will be transferred – consisting of $200k in A/R, $700k inventory and $400k in A/P – then a buyer can make an offer knowing that such financials are included in a purchase of the business (subject to adjustment at closing).  Provisioning of just tax returns, in substitution of a confidential memorandum, will leave a wide range of interpretations of what is included and will increase the post-closing litigation risk significantly.

Thirdly, one of the most under-valued outcomes of poor preparation is the fact that a buyer has to wait for the delivery of due-diligence documents that were requested. Such wait has a twofold negative impact: first, the buyer will perceive the business to be inefficient and poorly managed, and secondly, the lack of good due-diligence document flow will increasingly created the perception in the buyer that the seller is not truly motivated to sell the business. Both buyer “conclusions” will most certainly end in the buyer terminating an offer the longer the time stretches out.

Finally, selling a business takes a team effort, in particular, in the due-diligence phase. CPAs needs to review the tax implications of the offer for both parties, and attorneys need to draw up the Definitive Agreement. A poorly prepared business without a comprehensive confidential memorandum will result in a business owner very anxiously trying to coordinate advisors – with a high probability for errors – and consistently trailing document requests.

In sum, whereas a business seller might fear the upcoming due-diligence, in reality, however, it’s merely a verification of a previously – presented business description.  A business seller who is well prepared will not have to be concerned about any “smoking guns” in the due-diligence process, and byvirtue of such preparation, he can ensure a smooth process, and thus, significantly increasing the chances that a buyer will indeed complete the full transaction. Be ready for due-diligence!

A highly qualified M&A advisory firm like ours, with hundreds of transactions performed in the past fifteen years, is well versed to guide any business owner through the preparatory and due-diligence process.

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This blog contains excerpts out of the recently published book

The Road Beyond – What Nobody Tells You About Selling a Midsized Business?

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About A Neumann & Associates, LLC

A Neumann & Associates, LLC is a professional mergers & acquisitions and business brokerage firm having assisted business owners and buyers in the business valuation and business transfer process through its affiliations for the past 30 years. With an A+ Better Business Bureau rating, the company has senior trusted professionals with a deep knowledge based in multiple field offices along the East Coast and has performed hundreds of business valuations in its history. The firm’s competitive transaction fees are based on successfully completing transactions. For more information, please contact A Neumann & Associates at 732-872-6777 or info@neumannassociates.com

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“I recently contacted A. Neumann and Associates about getting a valuation of my business done. I spoke with Marc, who explained the process in detail. After meeting with Marc in order to get a clear understanding of my business, and what I was hoping to accomplish. His patience in answering all my questions and his knowledge of the proper way to market my business gave me great confidence that this is the firm I will be using to sell my business for max value. Working with Marc at A Neumann & Associates was very easy and professional. I did not know all that was going to be involved in selling my business but they helped me through the process. What I thought was going to be a just another one of those pushy sales companies was just the opposite. Polite, knowledgeable, and a pleasure to talk to and deal with. I highly recommend this firm to anybody who wants to sell now or down the road. Marc not only knows his stuff, but actually is a real nice guy.”

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“I recently completed an acquisition using A Neumann & Associates. Tony Valentino was very helpful and accessible during the entire process. They do a thorough job vetting both parties and got us to the finish line.”

Srini Mudambi

“Claus out of Florida helped us with the sale of our business. We had never done anything like this and him and his team walked us through the process from start to finish. We had some challenges through the process and Claus continued to show up even in the difficult conversations.”

Colby Harris, Co-Owner, Del Mar Designs

“Claus Madsen thoroughly helped us with selling our company. From the 1st introductory meeting explaining to us what was possible, to providing us with resources to assist with the sale. Claus was invaluable throughout the whole sales process. Claus was with us every step of the journey and always made himself available for any questions or issues that came up along the way. If you are interested in selling your business, I encourage you to reach out to Claus and the ANA team so that they can let you know what’s achievable. These guys will make it happen!”

Ron Harris, Co-Owner and Vice President, Del Mar Designs

“A Neumann & Associates is the only business broker I would use or consult with. They have assisted with 3 business sales over the past 15 years with me. They are honest and sincere and have always performed better than my expectations. They are the only one i would use for the sales of my businesses.”

James Belanger, Business Owner

“I wanted to take a second to commend the exemplary customer service from both you [Karin Neumann] and Mr. Valentino. It’s both a rarity in the industry, and very much appreciated.”

Andrew G., Investor

“We worked with Neumann & Associates to investigate the purchase of a research company in 2010 and found Achim to be capable, forthright and realistic. His depth of experience enabled us to fully understand our options, offering creative options that might enable the acquisition. While we didn’t acquire that particular company at that time, we know exactly who to call whenever we’re looking to buy or sell a business.”

Daniel Coates, Buyer

“Purchasing a business through this firm was a pleasure. Gary was very professional and transparent throughout the entire process. I look forward to working with A Neumann & Associates in the future.”

William Klemens, Buyer
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