How the pandemic is changing acquisition due diligence - use time as a friend to be prepared
Even if you're not thinking about selling your company for several more years, understand that COVID-19 is going to have a lasting impact on acquisition activity and the process itself for years to come. And you don't want the day to arrive when you want to exit only to find out that you weren't prepared for these changes and the ultimate company proctology exam known as due diligence. Let's review below some of the current known impacts from COVID on the acquisition process that could take you time (months or even years) to get prepared for. Using time as a friend now could better enable you in your dream of commanding a euphoric valuation outcome at time of exit one day.
How COVID is impacting due diligence:
- The due diligence process was already onerous, this pandemic is only making it more so. In addition to acquirers needing to become intimately knowledgeable about your business before they are willing to let you cash their check, now they need to dive even deeper to better understand how you've been navigating COVID. All this simply means don't expect that due diligence somehow will be easier, it won't be.
- Data was key before, more so now. When you look at a typical due diligence check list from most acquirers, you'll see it's filled with requests for you to provide them all types of data. Now with COVID, this data scrubbing is only getting more intense. Data related to your customer buying behaviors, your cash flow, your operating efficiencies, etc. And getting your data in good shape for sharing during due diligence can take months, even years to get right.
- Customer stickiness takes on a whole new meaning now. Even before COVID, acquirers wanted to understand how reliant your customers are on your company for a solution. The more reliant your customers are on your company, generally the higher the valuation you might expect to see from the potential acquirer. COVID is exposing this stickiness factor even more. During due diligence now, you can expect to see a very deep dive by the acquirer to truly understand all aspects of your customer buying behaviors and which behaviors temporarily changed and which may have changed permanently. Use time as a friend now to be analyzing this to understand it clearly. Even if you're not planning to sell your business for several years, you'll still be asked how COVID changed your customer buying behaviors THROUGH and AFTER the pandemic. Start monitoring it closely NOW.
- The mergers and acquisition world is now using the word RESILENCE very commonly as a result of COVID. The due diligence process months from now and even years from now will still include a deep dive to understand how resilient your company products/services were for your customers through the pandemic. Most importantly, they will look to understand how quickly you felt the pandemic, how resilient your products and services were during the pandemic and how rapidly your business returned back to positive growth levels. Use time now to be analyzing this resilience and monitor it closely as the pandemic continues to play out.
- During any due diligence, acquirers deep dive in to your financials to understand the financial performance of your business and to do so, they want to understand the normal operating aspects of your business separated from "one offs" that may have helped or hindered your financial performance. COVID is one such "one off" that you will one day want to be able to show the acquirer your "operating results" apart from COVID specific elements. 2020 COVID financial impact from things like government funds you tapped in to such as Payroll Protection Program will be considered a one off and should be identified uniquely versus the normal operating financials of your business. Costs you incurred during COVID that are one off items such as cleaning supplies and labor used to clean your facility above your normal cleaning expense, paying HR and Legal advisors to navigate COVID, lost productivity such as facility closure, etc. Capture all these separately now because during a future due diligence the acquirer will ask for clarity of your operating results versus these one off expenses and you won't want to rely on memory in addressing their questions.
- This pandemic has been so impactful on our economy and each of our businesses that acquirers are going to come out of it assuming your company captured a playbook of learnings for use when the next crisis hits. In the recent past, we had the financial melt down of 2008, twelve years later we have COVID....fool me once shame on you, fool me twice, shame on me. There will be a third crisis in the foreseeable future and acquirers during due diligence will expect to see that you've captured your playbook of learnings, what actions you took that worked well and which that did not.
- Lastly, COVID is changing how the due diligence process itself plays out in terms of a time line. Historically, the acquisition process got underway with the acquirer visiting your facility(s), having a presentation from your management team, tours and then beginning data sharing. COVID has now moved this around given facility visits have been deferred. More acquirers are getting comfortable with moving site visits and face time with people to later in the process. The process is starting with Data (see above) and only upon this exciting the acquirer, will they look to wait to schedule site visits. This raises the importance of your data even more because it's now the first taste the acquirer may get of your business versus prior to COVID they'd be able to sit with you and see your passion for your business. Now your data has to set the hook to get their interest. And also note that the first time an acquirer may want to meet you and your team could be moved to video as they begin to learn about you and your culture. Even after this particular pandemic has passed, this change in the due diligence process itself may remain in place as acquirers won't want to incur up front costs of time/travel to first sample what your company has to offer them.
Bottom line here is this, even if you see selling your business over the next few years versus now, you need to use time as a friend to be prepared to optimize your outcome. You don't want your dreams of a euphoric company sale to be dashed due to not being well prepared...start now!
