There are five aspects of due diligence that create a sensible success strategy even if you’re not in the market for a buyer or an acquisition right now. If or when you are interested in pursuing an M&A opportunity, these five considerations also position you well among potential buyers. Consider this list of five priorities in your annual assessment:
- Legal considerations: properly structured buy/sell agreements, attention to regulatory compliance issues, exposure to potential litigation.
- Human resource considerations: key employees, succession planning, incentive structures, concentration of ownership, anticipation of potential interested parties.
- Information technology considerations: systems vulnerabilities, scalability of business processes, digital transformation, intellectual property.
- Operational considerations: anticipating asset-based sales (may favor buyers) versus stock-based sales (may favor sellers), infrastructure investments and upgrades.
- Financial and tax considerations: working capital, tax benefits of different entity types, orderly financial records, contract health, revenue, and profit profiles.
These focus areas are evaluated separately by parties representing both buyers and sellers in M&A transactions, including internal or external transfers of ownership.
Evolving From Solo Expert to Entrepreneur
One way of understanding this preparation mindset is the popular distinction between working “in” the business versus working “on” the business. Many successful companies have been launched by technical experts who attract a client base by being the best in their field. These kinds of companies can thrive for years on customer goodwill and a continuous focus on acquiring and delivering work. This is working “in” the business.
In contrast, working “on” the business requires senior leadership to take a step back from the “get work – do work” cycle and adopt a more entrepreneurial view. These evolving leaders take time to focus on the inner workings of the company in each of the five due diligence areas listed above. They delegate project or product delivery to key employees so they can concentrate on monitoring process and performance and scaling the business to the next level.
While any of these focus areas could impact your company’s value in future sales, setting clear goals and metrics in each category can significantly boost the health and profitability of your business now:
- Net working capital position
- Fixed asset performance, utilization, and cost of ownership
- Workforce engagement, stability, and performance
- Customer and vendor relationships and contracts
- Geographic, market sector, process, patent, or technology advantages
- Cash flow, brand equity, and goodwill
Developing the Right Advisory Team
It’s important to have candid conversations with your leadership team about what’s working and what isn’t working in each of the key focus areas outlined above. The right mix of internal and external advisors can help you apply what you discover to capture more value from your existing operations. This brain trust might include your accountant, attorney, tax advisor, banker, or members of your board of directors.
As a business owner, it’s vital to become a student of the differentiators that make you successful. It’s equally important to stay vigilant for things you can improve to increase performance and profitability now while positioning you for M&A opportunities that may arise down the road.
Is there a capacity investment you can make now that could make your business more attractive to a future buyer? Could you restructure parts of your organization to optimize your tax exposure today while increasing future value? These are all things you can monitor with your advisory team so that you’re ready to make a move when the time comes.
Continue the Conversation
Clayton & McKervey’s thorough approach to due diligence leverages 25+ years of experience to maximize our clients’ return on investment. In the last eight years we have supported over $1 billion in transactions. Our team would be delighted to talk with you about setting up an advisory team and planning approach that fits your individual needs. Contact us today to learn more.