Fail to prepare, prepare to fail

Monday, 03 September 2012


    Business owners often want to wait for the ideal time to sell their business, but generational change, the need to pay down debt or access growth capital can dictate that a sale takes place in an unfavourable market. In these circumstances, "holding out" in the hope of improved conditions may damage the business, with corresponding loss of value.

    Experience suggests, however, that even in a "buyers’ market" good preparation before a sale process can help tip the balance back towards the vendor. Here are four key steps that can facilitate a successful sale process:


    Any decision to sell a business is based largely on a valuation of the business.

    The chances of a successful sale diminish significantly if initial value expectations are unrealistic or fail to take account of key business issues.

    Before embarking on a time-consuming and expensive sale process, it is important to critically assess the credibility of the initial valuation. The assessment should involve "sense-checking" the valuation assumptions, understanding what drives a buyer’s assessment of value and considering what risks could affect this. This should include the information likely to come to light during a buyer’s due-diligence process, assuming everything comes to light.

    Having someone outside the business challenge the reasonableness and achievability of financial forecasts is an important part of setting initial value expectations.

    It is also important to have a realistic expectation of the work involved in starting and running a sale process, including the time it will take to prepare information for due-diligence scrutiny. It is not unusual for sale processes to take longer than expected. A good rule of thumb is to double initial expectations.


    Any uncertainty during the sale process can destroy value as it increases the perception of risk, prolongs due diligence and in turn reduces momentum and competitive tension, ultimately affecting price.

    The primary causes of uncertainty are "black holes" coming from incomplete or inconsistent information and "surprises" during the process that can alter a bidder’s assessment, both of which can be eliminated or mitigated through appropriate pre-sale preparation.

    Considering the due-diligence needs of bidders and ensuring there is enough information to support diligence (checked for internal consistency before starting the process) is an important step in preparation. Taking the time to review and analyse available information in advance ensures problem areas can be identified, providing an opportunity to address them rather than being caught off guard once the sale process begins. Again, it helps to get the assistance of someone outside the business who can objectively assess information using the same approach as bidders during their due diligence.

    This pre-sale due diligence ensures a robust information set for bidders to base their diligence on and gives vendors comfort that they won’t be forced to change their numbers during the process.


    Since the global financial crisis, sale processes have attracted fewer bidders, who are competing less aggressively. This means preparation that makes it easier for bidders to participate (and at a lower cost) is key as it can help to increase the level of competition in the process.

    Examples of good preparation include ensuring the information memorandum (IM) has enough detail to answer bidders’ key questions. Fundamental gaps will give bidders doubts as to the level of information that will be there to support their due diligence.

    Another example is having well-prepared and user-friendly data rooms that shorten bidders’ due-diligence timeframes. Simple steps, such as providing data in Excel rather than in a PDF format, make it more user friendly and can reduce the workload for potential purchasers.

    Investing in either vendor due diligence or a "white paper" analysis – where the vendor’s adviser compiles key information to support the due diligence – will also make life easier for bidders. This is particularly beneficial if the business structure is complex.


    The longer the sale process, the greater the risk of changes in market conditions or business performance affecting the outcome.

    Making the process easier for potential purchasers does not mean ceding control of the process. It is easier for vendors to retain control of the process when they are confident they have considered bidders’ requirements and issues that may affect the sale timetable.

    The vendor’s timetable can be more aggressive when reliable information is available to potential purchasers from the outset and preparation has given the vendor a good understanding of the level of due-diligence work bidders will need to undertake.

    The more reliable information bidders can access, the less conditional their bids will be. Eliminating uncertainty should also leave vendors better placed to negotiate a "clean" sale, reducing the level of warranties, escrow and earn-out arrangements compared with a sale where a bidder still perceives unknown risks.

    Short-term pain for long-term gain

    Selling a business is tough work and market conditions are making it tougher.

    With everyone less inclined to take risks, inadequate information and poorly designed sale processes can lead bidders to say: "It’s too hard", leading to sale processes failing or dragging on with only a single bidder who gets to hold all the negotiating leverage.

    Clearly there is a cost involved in adequately preparing for a sale process (the vendor’s time and the expense of using external advisers), but weighed up against the cost of investing six-to-12 months in a sale process that doesn’t succeed, or having to sell a business at less than its fair value, it is an investment worth making.

    The preparation approach: "white paper" versus vendor due diligence

    Pre-sale due-diligence work undertaken by an adviser will typically fall into one of two categories:


    A compilation of information and explanations to assist bidders undertaking their own due diligence to form a view on the business, often prepared by external advisers in conjunction with management.

    The expectation is that by taking the time to compile information and ensure internal consistency, there will be time and cost efficiencies during the bidders’ due-diligence process, while giving the vendor confidence that the numbers will not change during a diligence process and after issuing the IM.

    With the white paper analysis the vendor manages the level and tone of disclosure, by agreeing on the content and extent of information and analysis provided by the external adviser.

    Information is provided on a "non-reliance" basis – that is, the external adviser assisting in preparing the information will not be entering into any level of commitment with bidders, who will need to form their own view on the information based on their own due-diligence procedures (although often management may be asked to provide some level of warranty as to the accuracy of the information as part of a sale and purchase agreement).

    As no reliance is being provided, there is no obligation to highlight issues to a bidder that could affect the purchase price or areas of concern, but their identification through the process should provide the vendor with an opportunity to deal with issues before bidders start due diligence, ensuring no surprises.


    Vendor due diligence typically refers to the preparation of a full-scope due-diligence report, made available to bidders on the basis that the ultimate purchaser obtains reliance.

    In other words, the purchaser enters into a contractual arrangement with the adviser who prepared the due-diligence report and has the ability to rely on it as if the purchaser had engaged that adviser to perform due diligence on its behalf.

    The advantage of vendor due diligence is that all parties can get access to a comprehensive report on which they know they can rely, potentially reducing their workloads.

    Although the bidders are still likely to undertake some level of due diligence themselves, this is likely to be significantly reduced, and possibly limited to a high-level review of the vendor due-diligence report by their own advisers, which may allow the vendor to drive a tighter timetable if the process is competitive.

    Vendor due diligence is somewhat unusual in that the due-diligence provider is originally engaged and paid by the vendor, but ultimately ends up in a contractual relationship with the purchaser. Although the initial scope is determined by the vendor in conjunction with the due-diligence adviser, this is normally done by reference to standard industry practice and the purchasers’ expectations of the report.

    Unlike a white paper, the ultimate obligation on the due-diligence provider to grant reliance to the purchaser means issues and concerns arising during the due-diligence process must be highlighted and addressed in the vendor report. Although engaged by the vendor, the due-diligence providers must maintain a level of independence and objectivity in their reporting.

    Paul Sweeney

    Jamie Irving

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