“Spooky, scary skeletons send shivers down your spine…” It might be better to run and hide if you encounter these due diligence ghouls this Halloween.
One of the joys of my work is regularly having the opportunity to get involved in ‘sexy’ M&A transactions and get my hands ‘dirty’ during due diligence. I predominantly have the pleasure of advising sellers on what steps they should take to maximise the value of their business and bolster their position at the negotiation table before setting foot in the room.
Of late, I have found myself increasingly working with clients on the buy side that wish to grow their business through acquisition ahead of a future planned exit. This is always an interesting experience, as not only do I have to flip my mindset, it also gives me the chance to critique how the seller handles the cut and trust of a transaction.
Aside from the common complaints (e.g. the seller not being properly prepared / having unrealistic expectations regarding the value of their company / their longstanding advisors being out of their depth, etc) there are some red flags that I always keep an eye out for during any deal. They may initially seem innocuous, but past experience has taught me that they can be a good indication that a skeleton or two may be lurking in the shadows!
Trick or Treat?
The 3 tricks that I watch out for during due diligence are:
1. ‘The bump and swipe’ – A classic distraction technique to mask what’s really going on… someone is a target, and unfortunately it’s not the seller!
2. ‘The reverse play’ – You ask a simple question and are handed reams of paper containing raw data to decipher, or you ask for the raw data and are given a Post-it note with some random numbers and text.
3. ‘The computer says no!’ – “The system doesn’t have a report for that” and/or Mary is the only person with access and she’s on an impromptu trip out of the office!
I am always up for a game of cat and mouse, and while it can sometimes be fun, it is ultimately the seller who pays the price for the tomfoolery; typically with a bottom of the range multiple, an elaborate earn-out structure and/or copious seller warranties! The buyer basically wraps up the seller like a mummy for their troubles and makes them jump through hoops before they get their final cheque!
Don’t let it fester
My advice to sellers is, if have the option to ‘trick or treat’, it’s far better to treat yourself by engaging a professional advisor to help guide you through the sale process. It pays to prepare for sale as early as possible, and to deal with any skeletons sooner rather than later.
While it may add a little extra cost upfront, it will pay for itself and ultimately save you future disappointment!
You can find out more about how H&Hendricks can help support your business with is growth aspirations by clicking here.
So what will it be… trick or treat? …Boo!
Ashley Bancroft, Partner at H&Hendricks LLP
Ashley Bancroft is a founding Partner of H&Hendricks. A qualified Chartered Accountant, he also holds an MBA from the University of Chicago Booth School of Business and specialises in finance, strategy and entrepreneurship, with particular focus on value creation.