Prepare for DD in good time

As a growth entrepreneur, you’ll likely face a private equity investment or a business acquisition – possibly both – at some point. In either case, you can’t avoid the DD (Due Diligence) process. Here, we’ll focus on what will be required from a financial administration point-of-view and why you should start preparing for it well in advance.

The DD process is often the most laborious phase of a business acquisition or investment for the entrepreneur. During it, your company’s operations and history are examined with a very fine-toothed comb. The purpose is the same as in a property condition inspection: before closing the deal, the buyer wants to ensure that the seller’s statements hold true and that no hidden structural issues are lurking beneath the polished surface.

High-quality financial materials and comprehensive customer data are key to successfully navigating the DD process. However, some of this material is challenging – or even impossible – to compile at the point when it is requested. If the required information is unavailable, incompletete or inconsistent, it understandably raises suspicion on the buyer’s end. Even if the deal goes through, missing material will affect the valuation, similarily to how findings in a property inspection influence a real estate transaction.

When the requested information is lacking or conflicting, it can understandably raise the buyer's suspicion.

The DD process kicks off when the counterparty provides a list of questions and material requests. With the help of your accounting firm, you can usually assemble the basic financial and tax package quite quickly. Even within these areas, there are a few things that require advance preparation, but more on that in future posts.

Well in advance, you should pay particular attention to the completeness and quality of customer-related information, so that the necessary data is available for a sufficiently long time period. The buyer is especially interested in matters that confirm the quality and competitiveness of your company and its offering. We will cover these topics more thoroughly in later posts.

After you’ve delivered the material and responded to the questions, you’ll find yourself in meeting after meeting, presenting the documents and answering follow-up questions from the counterpart. On the other side of the table sits a team of seasoned lawyers and investment bankers whose job is to meticulously scrutinize your material, find errors, and identify weaknesses in your business. And it won’t be for a lack of effort, as the process is carried out thoroughly and diligently, much as the name suggests.

The DD process is highly intensive, time-consuming and rarely a pleasant experience, especially for first-timers. However, you can influence both its duration and outcome by providing a comprehensive, consistent and error-free material package. This is possible only if you’ve prepared for it well in time.