During Due Diligence What’s BEST FOR The Goose Is Good For The Gander

One of the items I like best about representing small enterprises as an M&A Advisor is that no two times are the same. Yes, offers have common elements, but it is those unique details at the margin that must definitely be dealt with on the travel that often means the difference between success and failure.

To prepare our clients for those 80% deal elements in common we have written articles on each stage of the process and we review those articles with our client before the stage. So for example we will review the mostly asked questions from customers on conference phone calls and we will role play with this clients on responding to these questions. If your client knows what things to expect prior to the stage, any bump in the road does not turn into a deal threatening event.

We make an effort to manage and control what we should can, but generally something new surfaces that is new to our experience. How those surprises are dealt with often could possibly be the difference between closing and the deal blowing up. In a recently available transaction that we completed, we’d one of those first-time surprises.

Luckily we were able to get past it and improve our preparation for the next deal and as an added bonus, resulted in this article. Homework was arriving to a satisfactory close and the definitive purchase agreements, seller notes, and employment agreements were moving through the process with out a hitch. We were set to close on April 30 and ten days prior to shutting the buyer said, we just want to see your closing quantities through April, so let’s move the closing back 5 days.

What were we going to do inform them no? I said, well you have completed due diligence already, are you concerned about the April numbers? He said, no, we just want to make sure everything is on track. My radar went off and I thought about all of the events external to your deal that might lead to the deal not to close. How many deals failed to close, for example, that were on the table during the stock market crash of 1987?

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The second part of my radar said that people needed to be prepared to protect transaction value one final time. I recommended he generate his outside accountant to help us evaluate specific things like sales versus projections, gross margins, offer pipeline, revenue run rate, etc. We were heading to prepare yourself. We knew that if things appeared worse, the customer was going to request an adjustment.

Now here comes the shock. The exterior accountant discovered that there was a revenue recognition concern and our customer had actually understated profitability by a significant amount. This was discovered after the originally scheduled closing time and it designed that the customer had centered his purchase price with an EBITDA amount that was too low. We just take his deal value for the original offer and the EBITDA quantity he used and calculated an EBITDA multiple.

We then applied that multiple to your new EBITDA and we get our new and improved price. I knew that this wouldn’t normally be well received by our buyer and counseled our customer accordingly. He instructed me to improve our price. The good news is that we experienced a good relationship with the customer and he did not end conversations. He reminded us that he had earlier given directly into a concession that people had asked for and we added a couple of other favorable deal factors, but he didn’t move his purchase quantity.

We huddled with this client and experienced a serious benefits and drawbacks discussion. He do recognize that we acquired fought hard to improve his deal. He also regarded that the buyer had attracted his range in the sand and would walk away. The risk that people discussed with this customer was that if we returned to market, that would postpone his payday by minimum of 90 times.

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