Traditionally, the buyer performs due diligence. However, smart sellers know
that it's a two-way street. After all, for both parties it's important to
truly understand each other, to make sure that the other is strong and a
"good fit", and to uncover possible alternatives to acquisitions. And most
important, the seller doesn't want to get burned. Nothing could be worse:
You give a chunk of your life's energies into building a company, and then
you sell it to a con artist who "pays" you with a small lump of cash and a
big pile of worthless stock certificates.
A seller has a lot at stake. True, if you sell for 100% cash, the risks are
minimal. But this is rare. You are likely to have your compensation based on
the stock of the buyer. In a way, selling a company is similar to buying
stock for a portfolio: The seller wants a stock that will grow.
But instead of having to start to investigate a prospective buyer from
scratch, the seller should be informed ahead of time. That is, the seller
should have its own set of screening criteria and keep abreast of the
marketplace. So, when the seller is approached, it won't have to scramble.
In performing due diligence, the seller should employ the same checklists as
the buyer and ask equivalent questions. Areas of emphasis include the
following:
Financials: Has the buyer's growth been better than its peers? Also, check
for danger signs, such as increasing receivables. How much cash does the
company have? Does it have enough to pursue its goals? Also, perform a ratio
analysis on the company.
Strategy: Do you believe in the buyer's goals and strategies? Do you think
the company is headed in the right direction? Does the buyer have a history
of M&A strategy, if so, how have the acquired companies or "brands" fared?
Products/Services: Does the company have a competitive product line? Will
your product line enhance the company's growth?
Management: Finally, do you think the buyer has a strong management team? Do
they have prior experience with growing strong companies?
Actually, the last two questions are critical. But, unfortunately, many
sellers do not ask them. You want to make sure that your company is in
capable hands. And, no doubt, you want a buyer that can help grow your
company. So, do not be afraid to ask "due diligence" questions to the buyer.
It is customary. In fact, if the buyer is resistant, this is an ominous sign
that you may be dealing with the wrong buyer.
MergerPlace is pleased to have the esteemed Mr. Tom Taulli as the
managing editor of our MergerPlace M & A Advisor™ E-zine.
Tom Taulli is an expert in the M&A process. He is the author of the
critically acclaimed The Complete M&A Handbook (Random House) as well
as six other books written for publishers such as Bloomberg and
McGraw-Hill. Tom also teaches M&A at the USC School of Business.
Tom has been quoted extensively in the press, including the Wall
Street Journal, USA Today, Barron's, and The Los Angeles Times, and has
provided commentary on CNBC, CNN, and Bloomberg TV, as well as
appeared on a variety of top radio stations across the country.
Tom's books are available for purchase in our
bookstore.
Tom Taulli is an expert in the M&A process. He is the author of the
critically acclaimed The Complete M&A Handbook (Random House) as well
as six other books written for publishers such as Bloomberg and
McGraw-Hill. Tom also teaches M&A at the USC School of Business.