Secret Seller episode 6 – Due diligence

After starting to receive offers from potential buyers in last month’s episode, our Secret Seller is now at a crucial stage of the process – carrying out due diligence.

So, if you’ve been following their passage through the exit process, keep reading. However, if you haven’t read the previous episode, ‘Receiving offers’, check it out first.

As with a lot of things in life, whether buying a property or deciding where to go on holiday, carrying out comprehensive research and doing your due diligence is crucial.

It’s no different when you’re exiting your firm, although the shoe is very much on the other foot, with the buyer undertaking due diligence on your firm. Working closely with Brian, our Secret Seller made sure they were fully prepared for what was to come.

They said: “We accepted an offer, and that’s when the fun really begins – the delights of due diligence.”

“At this point, I wondered what else could anyone possibly want to know. With the original data dump and pulling together all the client data, apart from a few office logistics like who we used for IT, marketing, the photocopier, and contracts and files for compliance checking, there couldn’t be much. Oh, how wrong I was!

“Due diligence fell into four categories: Commercial DD (let’s abbreviate it – we do work in financial services after all!), Compliance DD, Legal DD and Financial DD.

“I should just add during this process (the bit between offer and completion), I had weekly meetings with our buyer that were really important. Some weeks it might only be a 5 to 10-minute call, but others could be up to an hour long, discussing progress updates and answering queries between us both.

“Back to the dreaded DD (note it’s no longer “delightful”…). For each of the DDs, I received a spreadsheet with lots of questions.

“For Commercial DD, it was all about the clients, our processes, what risk tools we used, the staff, T&C and regulatory stuff – so all things I knew without any problems!

“For Compliance DD, again, not too bad. I had provided a new business register for the previous two years and the buyers selected which new business they wanted to be reviewed.

“The Legal and Financial DD were the hard bits. I like to think that I know my company inside out, but these were just written in different languages!

“With the Financial DD, the request for information came in really late, and my accountant (who admittedly wasn’t the best) was climbing Kilimanjaro and wasn’t picking up my emails for three weeks. They’d also dumped everything on their bookkeeper, who wasn’t really qualified to help, so I did my best!”

“In hindsight, I’d tell myself: don’t let your previous accountant retire early and decide to sell the year after! If we’d had the same accountant for the last three years, things would have been a lot easier.

“Until two years beforehand, my accounts were still being entered into a spreadsheet, but it turns out Financial DD people really don’t like them! Ideally, we should have had the accounts on Xero, Quickbooks, or similar for three years.

“We got there in the end, but it was definitely stressful!

“Compared to Financial DD, Legal DD wasn’t too bad. The biggie was intellectual property – we had a few marketing items that caused issues regarding who owned them. For example, did the person who designed them have any rights over them? There were only so many ways I could answer: ‘I had an idea; I asked my marketing company to design it; they designed it; they invoiced me; I paid the invoice!’

“The DD went right up to the wire. Every time I thought that was it, another email came through. And with the Legal DD requests coming after the Share Purchase Agreement had been agreed by all parties, I did have to say ‘No’ to some things!

“You have to draw a line somewhere…”

Get in touch

If you are looking to sell your business and want an organisation that looks after you and every single aspect of the process, speak to Melo. Email hello@melo.co.uk or call 0113 4656 111.