When it comes to the process of selling your business, no phase is entered into with more dread than due diligence. I’ve heard a lot of colorful euphemisms for due diligence from business owners over the years. The most common has been to describe the experience as the business equivalent of a colonoscopy. Another analogy harkens back to adolescent memories that most of us would rather forget. One seller told us that going through due diligence felt like he was back in junior high school, standing naked in the locker room with everyone staring at him. Ugh.
While I wish I could say that due diligence isn’t all that bad, I believe strongly in setting realistic expectations about selling your business. Whether it’s feeling exposed or probed (is there an alien-abduction analogy in here somewhere?), due diligence is no fun. Here are three ways you might feel during due diligence, and some tips on how to get through it:
Exposed and vulnerable
There’s a reason why due diligence is compared to humiliating experiences like the ones mentioned above: Your business will be stripped naked and judged on its appearance. You will be asked to hand over documents to a buyer whom you have probably met only recently; documents that you have probably only shared with your closest advisors up to this point. Tax returns, bank statements, detailed QuickBooks reporting, lease agreements, employee files, your own salary history — almost nothing associated with your business is considered off-limits.
Tip #1: Gather and review as many of your business’ documents early on — especially financial information — so you know exactly what a buyer will be seeing. Due diligence is not the time for surprises.
You’ve probably never shared this level of information with anyone, let alone someone you don’t know all that well, but share you must. Being exposed at this level to a near stranger can lead to feelings of vulnerability. While few of us relish the thought of feeling vulnerable, it can often be the precursor to growth — for you and your business — and for reaching a new stage in life.
Tip #2: If you need to get comfortable with feeling vulnerable, check out Brene Brown’s popular TED Talk on the topic of vulnerability.
Poked and prodded
In addition to the sensitive information you’ll be asked to provide, you will likely need to answer a lot of follow-up questions. Variations in year-over-year financial metrics, whether its an increase or decrease, will require explanation and justification. Why did COGS go up? Why did you hire more contract labor last year? What’s gone into Miscellaneous expense over the past three years? You may be asked to provide the same information in multiple formats. You may also need to provide the same information to multiple recipients. In short, there are a lot of people to please during due diligence, and they’re all demanding.
Tip #3: After you’ve followed tip #1, try to anticipate some of the questions you think a buyer might ask, and how you will respond to them. [We go through this exercise with all of our clients, so be sure to hire a business broker who will candidly view your business like a buyer and help you prepare for this scenario.]
Defensive and exhausted
It’s easy to get defensive during the due diligence process. You begin to feel like no one believes a word you say unless you can back it up with irrefutable proof. In reality, that’s pretty much what’s happening. Due diligence is the buyer’s opportunity to uncover and analyze the risks — hidden or apparent — associated with your business. As someone who has owned the business for years, possibly decades, you may see your business as having little to no risk at all. But understand that the buyer hasn’t had the same opportunity to get comfortable with the risk inherent in your business, and is simply doing their best to protect their investment.
Tip #4: Don’t take things personally. Selling a business is in large part about transferring risk.
I remember my own due diligence experience as being tedious and never-ending, like raking huge piles of leaves while trees kept dropping their foliage all around me. It seemed like I could barely stay on top of the task. By the time it was all over I felt drained, spent, wrung out like a wet towel. I should have been happier at the closing table, but I was too tired to celebrate at that point. I just wanted to deposit our check and take a nap.
Tip #5: Don’t underestimate the fatigue factor; enlist as much help as possible. Like many things in business, getting through a task like due diligence may be harder than you think.
Locker rooms, aliens, medical procedures — however you want to describe it, due diligence is a necessary part of the process of selling your business. And like every part of the process, it’s best entered into with preparation and eyes wide open, and without losing sight of your ultimate goal.
If you have thoughts on what it feels like to go through due diligence, by all means share them in the Comments.