A business owner I know refers to due diligence as “the entrepreneur’s proctology exam.” It’s a crude analogy but a good representation of what it feels like when a stranger pokes, prods and looks inside every inch of your company.
Most professional acquirers have a checklist of questions they need answered before buying a business. They’ll want answers to detailed questions including:
• When does your lease expire and what are the terms?
• Do you have consistent, signed, up-to-date contracts with your customers and employees?
• Are your ideas, products and processes protected by patent or trademark?
• What kind of technology do you use, and are your software licences up to date?
• What are the loan covenants on your credit agreements?
• How are your receivables? Do you have any late payers or deadbeat customers?
• Does your business require a licence to operate, and if so, is your paperwork in order?
• Do you have any litigation pending?
In addition to these objective questions, they’ll also try to get a subjective sense of your business. In particular, they will try to determine just how integral you are personally to its success.
A subjective assessment requires the buyer to do some investigative work. It’s more art than science and it often involves a number of tricks of the trade:
Trick No. 1: Juggling calendars
By asking to make a last-minute change to your meeting time, an acquirer gets clues as to how involved you are in serving customers. If you can’t accommodate the change request, the acquirer may probe to find out why and try to determine what part of the business is so dependent on you that you have to be there.
Trick No. 2: Checking to see if your business is vision impaired
An acquirer may ask you to explain your vision for the business, which is a question you will have prepared an answer for. However, he or she may ask the same question of your employees and key managers. If your staff members offer inconsistent answers, the acquirer may take it as a sign that the future of the business is in your head.
Trick No. 3: Asking your customers why they do business with you
A potential acquirer may ask to talk to some of your customers. He or she will expect you to select your most passionate and loyal clients and, therefore, will expect to hear good things. However, the customers may be asked a question like “Why do you do business with these guys?” The acquirer will be listening carefully to determine who your customers are loyal to. If your customers answer by describing the benefits of your product, service or company in general, that’s good. If they respond by explaining how much they like you personally, that’s bad.
Trick No. 4: Mystery shopping
Acquirers often conduct their first bit of research behind your back before you even know they are interested in buying your business. They may pose as a customer, visit your website, or call or come into your company to understand what it feels like to be one of your customers.
Make sure the experience your company offers a stranger is tight and consistent, and try to avoid personally being involved in finding or serving brand-new customers. If any potential acquirers see you personally as the key to wooing new customers, they’ll be concerned business will dry up when you leave.
Special to The Globe and Mail
John Warrillow is the author of Built To Sell : Turn Your Business Into One You Can Sell. Throughout his career as an entrepreneur, Mr. Warrillow has started and exited four companies. Most recently he transformed Warrillow & Co. from a boutique consultancy into a recurring revenue model subscription business, which he sold to The Corporate Executive Board in 2008. He is the author of Drilling for Gold and in 2008 was recognized by BtoB Magazine’s “Who’s Who” list as one of America’s most influential business-to-business marketers.