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 appreciate your diligent approach to screening buyers and sellers as well as the high quality CIM that you produce.”

Andrey O, Investor

“Finally enjoying retirement after recently selling my business using the services of A Neumann & Associates. Joe Oddo provided the conduit to a successful transaction. Joe knew when to inject input and when to simply listen and allow the buyers to vent, step back and regroup. The outcome met our expectations and got us to the finish line, which included my staying with the company six months in order for the buyers to get their footing and keep our workforce in the loop. He helped at every step by providing his expert guidance & resources. Thank you!”

Emily Parker Myers, Co-Owner - Myers McRae

“I had been in touch with Karin and Gary from A Neumann & Associates regarding some opportunities and was looking forward to meeting with them. Hence, when they organized a seminar in Princeton, NJ, I was quick to sign up. The seminar was very informative as the team walked the attendees through various scenarios and referenced real life buying/selling situations they had been through. The sessions by Gary, Karin and Achim were crisp and focused and brought clarity to potential seller and buyers. I strongly recommend the team and look forward to continue working with them.”

Gaurav Tyagi

“Thank you for your Event on "How to value, Sell, and Buy A Business for Maximum Profit" and the insight into ANA’s approach on what is involved in the Business Exit for sellers. Garys Hervieiou's "Business Valuation", Achim's "Deal structure" presentation and Karin’s "Preparing the Package" are real street knowledge shared. They answered attendees questions which makes it more interesting for learning from others. Great for small businesses like us. The presentations were totally worth our time and travel for the event to Princeton, NJ from Rockville MD. Ravi Bhutani, President, CIPS”

Ravi Bhutani

“Gary, this is to thank you for an excellent job done in selling our business. We could never have done it without your professional expertise, dedication and time put in without reservation to make it happen. We will gladly and highly recommend you to anybody in our position.  It was a pleasure to work with you.”

Pat Iammatteo, Owner

“Your vetting is simply outstanding, among the best I've seen from a broker.”

Eric H., Investor

“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.”

Double Diamond

“Used A Neumann & Associates to sale my business. could not imagine having done it with out the patience and experience Gary provided. Thanks Gary,”

Dennis Frazier

“Working with Marc and his company was a pleasure. 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. Marc handled most of the interaction and he has one of the greatest demeanors. Again, it was a pleasure working with him and his firm.”

Douglas DiCeglio

“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
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