Due diligence before a sale is non-negotiable

Know your worth: Due diligence before a sale is non-negotiable, Corporate Finance Partner, Noel Winters explains why.

Despite a brief COVID lull, the pace of life has once again returned to its usual hectic pace where time is always at a premium. Yet in this world, almost universally, everyone recognises the importance of relationships and the value of partnerships. They enable us to achieve things which are fanciful in isolation and share the burdens and difficulties which we encounter across all facets of life. 

And despite this, much of our life is transactional. This is largely true in financial advisory, whether it be accountancy, corporate finance, or tax. I believe this model is broken – let me explain why.

For typical businesses and many of our new clients, we are asked to carry out ‘due diligence’ as they approach an exit, or indeed offer to buy a company. This is a critical and important service, to ensure the business is either prepared for sale, or the target is ‘as advertised on the tin’. But this is a largely retrospective exercise and effectively raises any issues that need to be fixed, or dealt with in legal documentation. So what’s wrong with this?       

There is a far better purpose for diligence, especially as part of a broader and far earlier exercise. The SME community in Ireland is facing more challenges than ever. Significant cost inflation, greater regulatory burdens, increased recruitment and HR challenges, and in many cases pricing and demand issues constraining revenue growth. I could write a full article on any one of these! The net result is that owners and management teams are more focused on their core business than before, and in many cases have limited time for medium-term strategic thinking. This is where partnerships help.

True value needs to be created at the outset. Everyone can write a valuation report, the key is to combine this with some form of critical analysis (call it diligence if you want), to identify the value levers that apply to a specific business, to design a plan on how to achieve them, and to monitor and assist in their delivery. This isn’t about a transaction – it’s about a relationship based on helping to build incremental value over the life cycle of a business. It’s about structuring and moulding key financial objectives and strategy – but it shouldn’t end here. Companies also need to plan significantly in advance for the myriad of reliefs, from entrepreneur and retirement reliefs to participation exemptions, tax-effective interim cash extraction, and ultimately how to design a tax-efficient exit. As with diligence, if you are at the altar, it’s probably too late. (Remember Roy Keane, fail to prepare, prepare to fail.)

Whichever way you slice it, mergers, acquisitions or sales are complex — deploying the correct level of due diligence to anticipate the obstacles that will come up before closing is key. Domestic and global transactions are often fraught with costly pitfalls and, if not managed correctly, could significantly deteriorate the expected value of a deal. (A 2020 study by Bain & Co. found that almost 60% of executives surveyed attributed poor due diligence as the defining factor for deal failure.)

With financial conditions expected to ease in the coming months, an upswing in M&A and sales activity is expected. So how about you make life easier for yourself? After all, the meeting I enjoy most is the one post a successful exit, the ‘where to, next?’ And I think you’ll like it too.

Why Fitzgerald Power? We help business owners solve the key strategic challenges they face. From fundraising and valuations to advising on strategic acquisitions, we offer corporate finance solutions for any and every issue that your business might face. Running a business isn’t always plain sailing, but we’re here to help you weather any storm, with a wide range of expert services on offer.

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