Due Diligence: Clean the Joint Up
Last week’s post about the importance of the seller doing a buyer’s due diligence before even bringing the business to market got quite a surprising number of questions and comments. What was also surprising was the aspect of the due diligence process that seemed to be the most confusing; specifically, “cleaning the joint up.”
But before we get into specifics on that topic, consider this: The general purpose of the seller doing a buyer’s due diligence is to identify the risks buyers will probably identify in your business and either eliminate them or manage them.
Risks that a seller can eliminate would include such issues as making sure all tax returns are filed, all employee records are current, intellectual property is properly protected and the like.
Risks that a seller can manage would include retention of key employees, keeping important insurance coverage – especially errors and omissions (E&O) – current, seeking an early extension of purchase or sales contracts that impact the business’ revenue stream and similar issues.
But identifying and managing the perceived risks isn’t the only aspect of due diligence that a seller must consider. The “cleaning the joint up” aspect addresses the buyer’s initial impression of the business – and first impressions are vitally important to the value a buyer will put on the business.
But before we get into specifics on that topic, consider this: The general purpose of the seller doing a buyer’s due diligence is to identify the risks buyers will probably identify in your business and either eliminate them or manage them.
Risks that a seller can eliminate would include such issues as making sure all tax returns are filed, all employee records are current, intellectual property is properly protected and the like.
Risks that a seller can manage would include retention of key employees, keeping important insurance coverage – especially errors and omissions (E&O) – current, seeking an early extension of purchase or sales contracts that impact the business’ revenue stream and similar issues.
But identifying and managing the perceived risks isn’t the only aspect of due diligence that a seller must consider. The “cleaning the joint up” aspect addresses the buyer’s initial impression of the business – and first impressions are vitally important to the value a buyer will put on the business.
Preparing for a Sale
Last week’s post was intended to cover a broad range of due diligence issues but they all, at bottom, were essentially intended to eliminate confusion and uncertainty on the part of a buyer; to reduce the perceived risk the business represents and to present the business in the best light. This is part of the preparation work that goes into selling a business and where a professional business broker would be very helpful. After all, professional business brokers do this stuff all the time._____________________________________________________________________________
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Though transparency is a worthy goal in this endeavor and certainly should be front and center when pertaining to the financial records and contracts, by “cleaning the joint up”, I mean something more basic. The best example I can think of to illustrate what I mean is an owner’s efforts and preparation when selling a house. If you’ve ever sold one, I expect you’ll be able to follow along with this example.
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The Process of De-Cluttering
Few people will sell more than one business in their lifetime but most people will sell more than one home. To understand what I mean by “cleaning the joint up”, think about it in terms of selling your house.
I would imagine that anyone with a three-digit IQ that has begun seriously considering selling their house would be able to figure out at least the basics of where to start. Are the kids’ toys all over the place? Is there “dog nose” all over the living room window from Fido anxiously awaiting the master at the end of the day? Has the six year old left a half-dozen of Crayola‘s best on a South-facing window sill and now the floor beneath that window appears to be a reproduction Jason Pollack masterpiece? Is there still a hole in the drywall in the den from when the seller expressed his displeasure with the officiating at the NFL’s 2018 NFC Championship game?
These are easy things to spot for even the most jaded observer. But if you don’t understand the more subtle things that need to be done to make your house most presentable to buyers, your real estate agent will certainly give you a list of suggestions.
Such suggestions could range from mulching the planters and painting the living room to de-cluttering the kitchen counters and tossing out the rotten rutabaga at the bottom of the veggie drawer in the fridge.
Good real estate agents will advise you to get rid of the clutter; the kid’s toys, the dishes in the sink, the junk in the garage, the ’57 Plymouth that’s been sitting on blocks in the back yard since the O.J. Simpson trial did so much for harmonious relations in the United States.
When selling a business, a professional business broker – like the real estate agent for your house – knows what business buyers will want to see and how the business is best presented. And again like the real estate agent, that’s because we do this stuff all the time.
De-Clutter the Business
The objective is to show the business in the best possible light – from clean and organized books to pleasant colors in the waiting room. Remember that you want the buyer to “imagine” him- or herself owning the business. Remove as much of the seller’s personal stuff as possible. If the walls are covered with memorabilia, get rid of whatever does not directly pertain to the business.
For example, if the business has received awards for excellence of service or sponsorships of worthy community causes, keep them on display. Any letters from clients or customers that effectively are testimonials to the business or any of the staff, should be visible; possibly framed and hung or displayed on shelves.
On the other hand, if there are photos of the boss on a golf course with the King of Siam or the local mayor – gone! There’s one of him without a shirt on some dock somewhere holding a big fish? It goes in the box marked “Boss’ Garage”. And, needless to say, if the boys in the service department thoughtfully decorated their walls with the past six years’ Hooters calendars, it would be advisable to replace them with one from the Chamber of Commerce or a local religious organization. And for heaven’s sake make sure it’s a current one!
The Buyer’s Team
The buyer of a business is unlikely to visit alone. If the buyer is a financial buyer and is considering a business as a “first time” buyer, he or she will likely have a spouse, knowledgeable friend or professional advisor along. If the buyer is a strategic buyer, there will probably be multiple people from the acquiring company on that first visit – and on subsequent visits. One or more of these visitors will probably use a restroom. Need I say more about this??“Stage” the Business
The Bottom Line
Like selling a house, if you want the highest price for your business it has to look good – both operationally and physically. If you walk through the business and you realize it looks like crap, you can be sure that, because you’re biased to the good side, it looks worse than crap. And a buyer – biased through skepticism – will see it that way or worse. From the operational standpoint, make sure you have the necessary talent lined up. For the physical side, use some of that talent – specifically the professional business brokers – to advise you on how the business should be presented._____________________________________________________________________________
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If you have any questions, comments or feedback on this topic – or any topic related to business – I want to hear from you. Put them in the Comments box below. Start the conversation and I’ll get back to you with answers or my own comments. If I get enough on one topic, I’ll address them in a future post or podcast.
I’ll be back with you again next Monday. In the meantime, I hope you have a profitable week!
Joe
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The author is the founder of Worldwide Business Brokers and holds a certification from the International Business Brokers Association (IBBA) as a Certified Business Intermediary (CBI) of which there are fewer than 600 in the world. He can be reached at
jo*@Wo*******************.com
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