Whether you are preparing your company for sale to a third party or building long-term value for yourself, as an owner, you probably perform a SWOT (Strengths, Weaknesses, Opportunities and Threats) analysis. You likely do this annually to capture the internal and external factors that affect your company’s ability to do business. Business plans that cascade from the SWOT analysis usually focus on highest priority, immediately needed “better, faster, stronger” goals.
If you are considering the sale of your business in the future, consider adding a due diligence preview to identify issues that might affect your company’s value. Unless you’ve had a problem and had to react to one of these issues, you and your management team may not even be aware of them. In an ideal world, an owner would identify any major potential areas of risk and mitigate them prior to the buyer’s scrutiny.
Some problems are obvious and will make going to market a non-starter. These are things like not having current and correct I-9s for your employees, or having your largest customer upset and suing you about a serious shortfall. There are many less-obvious areas that can be evaluated well before the decision to sell is made. It can be hard to “see” these issues since we are used to them, so it’s often helpful to have a fresh pair of eyes on the company for “blind spots.” Some actual examples we’ve seen over the years include:
Leases — If the seller does not own the property or is in a tight real estate market and does not have a relationship with the landlord, the future feasibility of his company running profitably could be at risk. If the buyer’s rent expense will increase dramatically and/or your employees must change their existing travel to work (causing potential losses), this could be a big problem.
Environmental exposure — When was your company’s last independent review of environmental policies, procedures and potential problems? Many buyers will require an independent environmental expert report. This might include interviews with your team members as well as property and material inspections. If you don’t have a regular review, it might be worthwhile to identify any issues in time to make corrections if there are any oversights. Cleaning up the soil where the workers have been dumping used oil for years will be expensive!
Client contracts with problem wording — Have you ever seen an “indentured servant” type contract? In this case, a contractor committed to a three-year contract with a city park district to provide services for a fixed price with an annual CPI escalator. The problem was that the park district could cancel the contract with 30 days’ notice, but the contractor couldn’t. The owner had committed his company to provide services during that term with no way to cancel or modify the contract (except for lack of payment). The bigger issue was that he had underbid the work to get the contract, so he was “stuck” for three years. Imagine what a surprise that was when someone finally explained what that contract said. Not very appealing to a prospective buyer.
When you read these examples, I’m sure you are shaking your head wondering, “Who lets this happen to their business?” The truth is that it seems everyone has some issue once their details are scrutinized. Deals that were on track fail to close for reasons owners didn’t even know about in some cases.
It’s a good idea to “preview” the due diligence that would be applied by a buyer before you think you are ready. If you know you have an issue, you can manage it prior to going to market. If you didn’t find an issue, I’d be surprised, but you would have peace of mind. In this case, no one likes surprises. Be prepared with a preview of your company’s due diligence.