A review of diligence material and readiness assessment is often key to a financing or sale process

Industry News | Posted December 19, 2016 by John C. Simons

We are trusted to assist dozens of businesses each year with important capital raising or M&A projects. The projects are vital elements of bigger plans, executing on business growth strategies or the final step in a career building a business. These projects can be demanding and can take as long as six to nine months to complete. We understand the substantial resources that are committed to these efforts, the potential costs of failure and our firm has employed a few practices that greatly increase the chance of a satisfactory completion of the planned project. One of these practices is the thorough review of the diligence material that will ultimately be requested by the investor, and allows us to make a readiness assessment prior to starting the project.

As we work in the middle market, our clients have unique businesses with stories, sometimes bear unusual risks and often have grown quickly, in some cases, by-the-seat-of-their-pants.

Raising capital and advising on M&A projects typically involves approaching professional institutional investors or strategic buyers on behalf of our clients. We know what material these counterparties expect and would like to see on the one hand and we know what scares them off on the other. We also know that if material issues are discovered during the diligence phase which were not known or disclosed, which cause the investor to adjust their approach in any way, the chance of closing the project is reduced by half. Some investors even look for ‘gotcha’ sorts of issues in diligence, allowing them to renegotiate the deal in their favor late in the process.

As a result, we approach virtually every project with a two-phased project plan. In the first phase, we complete an initial business valuation and assessment of the readiness to approach the institutional market. The second phase is the execution phase. The initial readiness assessment involves reviewing most of the due diligence materials that might ultimately be collected and examined by a counterparty. Only in reviewing all of these details will we truly understand the business risks that an investor might identify and face. With a detailed sense for the risks of the business and an appreciation for the valuation attributes of a business, we are then able to advise a client on the transaction process steps - and we can together assess the best way to Realize Full Value.

Sometimes we conclude that we should proceed immediately with the process, and other times there are some issues to address before proceeding. Is there an important customer contract that has expired? Is a recently implemented process generating greater profitability, suggesting that a quarter or two of improved results might materially impact the project profile? Is the leadership team missing a key member that would make the team more effective?

We may take 2 months or 2 years working with the client to address the outstanding issues, putting the business in the position to best execute on the agreed-upon plan. And, once these things are addressed, we can move ahead with the execution phase of the project. While it might seem counter-intuitive to stop and assess before launching ahead, our experience gives us great confidence that this is the only way to reliably proceed with such a resource intensive project, and such a seminal event for our client.