Two sides of the same coin – A guide to Due Diligence

17.4.2019

A clean exit and a high multiple. That’s all sellers are after, right?

The answer is of course, no. Cultural and strategic fit, growth capital, opportunity to diversify, development for key talent, legacy preservation and brand retention are just a few of the many considerations business owners have when selling their business.

But how do you know whether the buyer and seller are truly aligned? Beyond the glossy Information Memorandum (IM) and the initial courting process, there’s a little thing called Due Diligence (DD). In its rawest form, this involves accountants and lawyers sifting through a Data Room to make sure all the claims in the IM can be supported, and there are no skeletons in the closet. At a deeper level, this is a chance to make sure the parties will truly get along before the marriage is consummated.

For sellers, DD is a fast moving and often exhausting process, with potential buyers asking a barrage of questions to understand the business, assess its value, and identify key risks. Sellers can often feel like the process is very lopsided. There are a lot of questions, many of these can seem negative by their nature (someone thinks my baby is ugly?), and it can feel like you’re on on the back foot. The seller is usually going through the process for the first time, while the buyer is following a well-worn path.

On the flip side, buyers have made an initial call that there is a strong fit between the two entities. The non-binding offer is “in the ballpark”, and the target seems to strengthen your current capability / bring new capability / increase your market share / reduce overheads. DD is an opportunity to test these assumptions. For a buyer, DD may reveal that a major customer is planning to withdraw their business, that IP is held within a small group of people, that there are pending lawsuits, a history of complaints from employees or business practices that are unsustainable under your leadership. All of this can have material implications on value, and what the combined entity looks like post-transaction.

To help align the interests of buyers and sellers, DD issues should be classified into three main areas. Having good advisors (corporate, financial and legal) who can effectively separate items into each of these areas is crucial to the success of your transaction:

  1. Matters impacting on value (which should be dealt with as soon as possible in the process to avoid any last-minute surprises and degradation of goodwill between the parties);
  2. Matters to be addressed in the sale and purchase agreement (risk allocation); and
  3. Matters which are simply business improvement to be addressed post-transaction.

Managing DD is a highly involved process. From the buyer’s or seller’s end, managing the flow of information, keeping the process focused, and making sure both parties are on the same page is key to pushing forward to a successful close.

In practice, a robust DD process on both sides will also ensure a higher likelihood of success post transaction. Once the value is agreed, an operating plan can be mapped together with the benefit of the issues that have been highlighted during the due diligence process, rather than nasty surprises surfacing after the deal is done.

In summary, sellers should not be scared about heading into a Due Diligence process. Think of DD as the tool that enables your business to unlock its potential value, or at the very least, an investment that allows you to retain the value that you have worked so hard to create. If there’s something that’s going to prevent the partnership being successful in the long term, it’s much better to find this out before you say “I do”.

18.7.2019

Sector Dashboards July 2019

Our monthly dashboards cover seven key sectors of focus, with each sector built up by several subsectors that cover similar companies based on; products, end markets, services, assets classes or other characteristics. The publications include all companies listed on the Australian Stock Exchange that are actively traded and covered by research analysts, and hence have […]

Read more
10.7.2019

Top ranking in industrial and regional midmarket league tables

From manufacturing precision sensors to forging manhole covers, industrial companies are a vital base for Clairfield International. Clairfield’s industrial team, led by Chris Gregory and Dirk Freiland, is recognized as a top advisor for midmarket industrial deals. Refinitiv ranks Clairfield International as number 6 in industrial deals and number 13 in consumer materials. The Refinitiv ranking […]

Read more
05.7.2019

InterFinancial continues to power ERM

InterFinancial has advised energy retailer and energy solutions provider ERM Power on its 50% acquisition of industrial automation and electrical engineering company, Alliance Automation.  Alliance Automation is one of the largest independent electrical engineering and automation solution providers in Australia, with a team of more than 190 people and offices in Queensland, New South Wales, […]

Read more
02.7.2019

IFL Ventures finds the solution for BCT 

IFL Ventures, a division of InterFinancial, has advised Canberra-based cyber security company BCT Solutions on its sale to Accenture.  BCT Solutions was founded in 2015 by defence force veterans Patrick Batch and Angus Heatly. With about 50 staff, it has offices in Canberra and Brisbane, and specialises in command and control, cyber security, cyber defence services […]

Read more
25.6.2019

Snapshot – Security Software: Increased spending in a highly fragmented sector

GDPR requirements and high-profile hacks are driving significant cybersecurity spending. Security software is highly fragmented and larger companies are seeking to offer all-inclusive solutions, via acquisitions. 70% of M&A exits in cybersecurity are below USD 100 million, showing a robust midmarket in this segment. Read the report here: Security Software Snapshot. Joseph Sabet leads the security […]

Read more
24.6.2019

Sector Dashboards June 2019

Our monthly dashboards cover seven key sectors of focus, with each sector built up by several subsectors that cover similar companies based on; products, end markets, services, assets classes or other characteristics. The publications include all companies listed on the Australian Stock Exchange that are actively traded and covered by research analysts, and hence have […]

Read more
20.6.2019

Traps in post-merger integration

So, you have found a growth partner, survived the due diligence process, closed the transaction and held the celebration dinner. Congratulations!! You are now at day 1 of the rest of your business’ future. All the promises made are now long in the rear-view mirror and the day to day running of the merged business […]

Read more
04.6.2019

Clairfield expands in Benelux with new Dutch partner, a leader in midmarket M&A

Clairfield International is delighted to announce further European expansion. Vondel Finance, based in Amsterdam and a leading name in midmarket M&A in the Benelux region, has become Clairfield’s new exclusive partner for the Netherlands. Vondel Finance, founded in 2004, offers advisory on both the buy and sell side with a client-centric approach for corporates, private […]

Read more
20.5.2019

Top ranking in consumer and regional midmarket league tables

Clairfield’s consumer team, led by Albert Schander and Gary Ecob, has become known as a top advisor for food ingredients, foodservice, and other consumer deals. Refinitiv (formerly Thomson Reuters) ranks Clairfield International as number 5 in consumer products & services, and number 7 in consumer staples. The Refinitiv ranking also gives Clairfield leading positions in […]

Read more
16.5.2019

Sector Dashboards May 2019

Our monthly dashboards cover seven key sectors of focus, with each sector built up by several subsectors that cover similar companies based on; products, end markets, services, assets classes or other characteristics. The publications include all companies listed on the Australian Stock Exchange that are actively traded and covered by research analysts, and hence have […]

Read more