Getting ready for Buyer discovery

Its only natural that buyers want to learn as much as they can about your company before they acquire it.  This discovery is essential to their valuation, risk analysis, the terms of agreement and integration.  The more you help buyers through this discovery, the more likely you are to reach your M&A objectives.  The first phase of discovery is what I call exploratory diligence.  Its done before a term sheet is generated when buyers are still evaluating whether to make a proposal and what the terms might be.  So you want to make sure buyers get accurate information in a clear manner and on a timely basis.  Part of our job at Corum is to make sure the buyer requests are reasonable. 

 

Many entrepreneurs dont realize it, but the buyer is also evaluating the executive team and the analyses used to manage the business. One of the best exploratory diligence questions I ever had was show me the reports you use to manage the business.  Entrepreneurs who are focused on their technology and closing the next sale may not realize how easy it should be to produce most analyses that buyers want. They also dont realize that the inability to respond quickly with quality analysis reflects on management, the business processes and financial controls. Here are a few examples.

 

A report that will help support your revenue forecast (and every seller wants show a strong, defensible revenue forecast) is a snapshot of your sales pipeline. So much can be learned from this one report. For example, it helps a buyer to explore not only how strong your sales pipeline is but assess whether your revenue forecast is achievable.  It also reveals whether you understand your sales cycle and the critical decision points.  It  reveals the methods you use to manage and shorten the sales cycle, whether your sales forecasting methods are structured and your lead to close ratio.

 

Many companies dont track backlog or have the processes to do so reliably. Its an important metric. A CFO once told me that he doesnt get timely reporting on new sales. The operational team may win a sale, land a project or generate a change order but they dont provide details to accounting until the first invoice is due. Unfortunately this process failure sends the wrong message.

 

Some other good examples are customer concentration and market sector concentration illustrations.  Who are your top 20 customers and how much revenue does each one contribute this year? What are your revenues by segment and the customer demographics in the important segments?

 

Preparing these analyses in advance reflects well on you.  These snapshots can be included in the financial memorandum with updates in the management presentation or in response to specific buyer requests. In any case, youll need them. Generally speaking, if a buyer thinks the analysis is important to assessing the value of the business, you should consider using the analysis to manage your business and prepare for M&A.

Posted by , Senior Vice President on 1 December 2011
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