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The Sell Side Masterclass for Tech Services Founders: Due Diligence
EPISODE 245.
Key Takeaways from this episode:
What due diligence is: The buyer’s inspection/audit of the seller’s business to confirm the story, financials, contracts, and assumptions made pre-LOI.
The emotional shift for sellers: Post-LOI can feel like “we’re done,” but diligence is often the most challenging phase and can be exhausting and distracting.
Why buyers do it: Risk mitigation and validation, plus identifying upside (synergies, growth investment opportunities, consolidation savings).
Common seller mistake: Underestimating diligence and showing up unprepared, both emotionally and operationally.
Role of an M&A advisor: First point of contact, ensuring data is clean/defensible, fast response cadence, and pushing back where appropriate.
“Scope creep” reality: Multiple outside parties (QoE, tax, legal, integration) often ask overlapping questions, creating a “Groundhog Day” effect without strong process management.
Top diligence areas buyers focus on: Revenue quality, customer concentration, contracts/renewals, security posture, key person risk, and scalable delivery model.
Retrade risk signals: Business performance softening during diligence, messy financials, messy contracts, or major unexpected changes in the business.
Keep momentum (~90 days as a good diligence window) and don’t let diligence distract leadership so much that performance slips. Revenue Rocket can help prepare you to sell your business from before, start, to finish.
Listen to Shoot the Moon on Apple Podcasts or Spotify.
Buy, sell, or grow your tech-enabled services firm with Revenue Rocket.
EPISODE TRANSCRIPT:
Mike
Hello! And welcome to this week’s Shoot the moon podcast podcasting live and direct from Revenue Rocket world headquarters in Bloomington, Minnesota. We are the world’s premier, M&A advisor to tech enabled services companies with me today, are my partners, Ryan Barnett and Matt Lockhart as we continue our work through our master class.
Matt
Ryan, what? Do you got going there?
Ryan
How’s it going? And, hey, Matt, thanks for joining us here today as well of.
Matt
Course. Great to be here. I know we got another interesting topic, in our series that, you know, we’re getting a lot of good feedback on this master class on, you know, how to maximize the value of your business when you’re ready for a transaction. So let’s keep it going. Yeah.
Ryan
And then thanks for setting that up. Matt and Mike, you know, heretofore what we’ve talked about is getting through that decision of knowing when to sell, getting your house in order, understanding what your firm is worth and what you’re going to take home, we transition that into the process. So working with your team kind of what month one looks like, how you find buyers and… what goes on and indications of interest. Again, it’s an Loi. And then last time we covered deal structures and things like earn outs and selling out. So today, if we follow that logical progression and you think from the start of a process to where we’re at now the deal terms have been struck in an Loi, and what happens after that, in nearly every case, at least that I’ve seen is that we move into a due diligence process. And Mike, I will just get us started with an easy question here. But what is due diligence and what does it mean for buyers and sellers when we get to this point and just help define due diligence to start?
Mike
You bet Ryan. So due diligence is really the buyer initiating an inspection of your business. If you’re the seller to confirm what you’re saying about your business is actually correct, and what you’re saying as it relates to your financial data, your legal data as it relates to your contracts, etc, so that they understand that what they’re buying, any assumptions they made in analyzing your business in preparation for the Loi, are in fact proving out to be the case. And so, you know, what happens is the buyer sort of shifts from the excitement to, hey, you know, this one plus one really equals three or four to risk mitigation, right? Diligence is designed to surface risk and in some ways price it in. If there’s things that were unforeseen in there that are discovered in their analysis. So the volume of review and questions about the business and requests about the business and its documentation, particularly financial and legal turns to much like an audit of the business. And there’s a big emotional shift for sellers because, you know, all diligence efforts are challenging because there’s you know, requests from a buyer for things that you may not have looked at in some time and your ability to be prepared and to be able to answer.
Matt
Confidently and.
Mike
to hopefully have worked with a good advisor helping you come to market and doing pre diligence work has been put in place to minimize your distraction as you continue to run the business moving forward? Yeah.
Ryan
Mike, that’s a great setup. You know, we do both buy side work and sell side work here. And we’re first in understanding what that diligence request can look like as well as helping people defend those requests. And I tell you we coach people from day one, that first request is pretty daunting. And so it looks like a lot. And in reality, when you’re going to market and going through a process and you have an advisor by your side, this process can be a little less daunting if you’re tackling it, but it does feel like a lot. Matt, if we think about this in like real world practice and you think about technology tech services firms, and MSPS, csps, and app development firms, you know, what’s the biggest mistake sometimes these firms have when they’re starting that diligence process.
Matt
Yeah, I think the, you know, Mike touched on the emotional aspect of it, you know, it’s high emotion to enter any process that you are looking at to transact your firm. And then, you know, you get to that Loi stage and you feel like, hey, somebody is really interested in this business. This is done, right? And they minimize, you know, the due diligence process, they minimize the risk that occurs in the due diligence process. And quite honestly, oftentimes, if they are not working, you know, with a good advisor, they are unprepared for the due diligence process. So, the biggest mistake is both emotional, right? In the context of thinking, you know, once a LOI is signed, you know, this is going to be easy and then practical in that they, you know, simply are not prepared for, you know, the audit and inspection, you know, that is forthcoming. So, you know, and this isn’t the case with, well, any of our clients. But I was reading an article just last night about uncle nearest whiskey. And this is like the hottest whiskey on the market. You know, three years ago, the founder, you know, valued the business at a 1,000,000,000 dollars, well after inspection. You know, it looks like they’re about a break even company if not less. So you got to kind of make sure that you put your, you know, you put your yourself in the eyes of a buyer who needs to ensure that what they have been promised is true. And the more organized and practical that you can make that due diligence process without emotion, you know, really the better.
Ryan
And having your, that’s such a great point what a buyer’s trying to do here is validate, and the seller’s trying to kind of prove and sometimes that leads to a mismatch in what’s being acquired. Mike, I guess the question here jumps a little bit off of what we were talking about earlier, but how do buyers end up using the results of due diligence? Then in the case that I heard with matt, I heard perhaps different deal terms, but what else do buyers utilize the results for?
Mike
Well, it certainly can, you know, could mean different deal terms, but it also, you know, emphasizes where a buyer may need to invest in the business to further grow it or to further realize their return. For example, there may be an opportunity to invest in further sales and marketing resources to, you know, accelerate growth or there may be an opportunity to get consolidation savings with an existing operation, particularly if the buyer is either a strategic buyer running a similar business albeit larger or, you know, someone who has outside capital in a strategic business where there can be some savings when they combine the businesses and those synergies or those savings usually go to the buyer, right? So validating where there’s opportunities for, not only, you know, maybe chinks in the armor in your own business, but also where there’s synergy opportunities. And discussing those synergies with you ahead of time are all things that impact their return rate, right? And they’re going to want to make sure that they have clarity around all of those things to make sure that they can get the, you know, the highest return for their investment. So when you think about risk, you know, yes, risk is certainly a component of mitigating risk and understanding risk. But also the upside potential of the combination is something that, you know, people certainly focus on in diligence.
Ryan
Yes, and even some of the outputs on that might be extreme clarity around an earn out. So, last week, we talked about deal structure and part of the LOI is going to be perhaps high level on an earn out. You have to hit xyz revenue and xyz time to get xyz result. And so due diligence also can have some results to your point. If you have the opportunity to capture upside that can happen, you can also have business improvement during that time. If you’re an extreme growth, businesses can be a great time for a buyer or for a seller to really perform well to the point where you have to take another look at what that deal looks like. If we’re in this process and we’re aiding sellers. Matt… you know, what’s the role of an advisor during that? You know, where do other us or someone else? How does an M&A advisor come into play during this part of the process?
Matt
Yeah, I mean, if you know, it’s probably a good debate class on… what is more important in the role of an advisor to get to a LOI with the right party or to successfully move through the diligence process to close, you know, with the right party. So a good advisor is really, you know, side by side and taking on the role of first point of contact for all diligence related items. And you know, as you know, it’s sort of the old Mary poppins saying, well begun is half done. A good advisor is going to ensure the cleanliness of all the data that it is in line with… the story that’s been told towards the LOI. There’s cleanliness in terms of the chart of accounts, obviously, the PL and the balance sheet and, et cetera. So the advisor is going to make sure that going into the due diligence process, everything is well understood. It is absolutely defensible against the expectations of a buyer. And then, you know, obviously, there’s need for clarification throughout the due diligence process. And the advisor, is ensuring that there’s a very quick response. Now, in addition to that, you know, as we’ve talked about in the past, there’s always nefarious actors in the marketplace who are attempting to, you know, have a history, of bait and switching or re trading, and they, you know, they work towards getting somebody under LOI, you know, with the knowledge that they’re gonna try to reduce the purchase price, you know, come hell or high water. And part of the advisor’s job is to ensure and understand where there’s indicators that could impact the eventual transaction price. So the advisor is absolutely critical, should be very forward in the process. Should be very well organized and, you know, ready to get your elbows up if need be during the due diligence process.
Ryan
It’s really well said, I think that what we lead from due diligence, and part of what’s in our next podcast we’ll be covering too is, the crafting of those definitive agreements to your point that they, these coincide together and can flow from one kind of process to the next. It’s a, having a con, continuity throughout starts to become critical for the success of a deal. Mike, I’m gonna go back to a little topic here and, you covered this a bit, and I just wanted to make sure that we’re addressing this or the sellers really understand kind of what firms are looking for. So, you know, it seems like the list always explodes like we start out small, then it’s if we dig up, we find a little bit more and we find a little bit more. And then there’s just a lot of different areas of focus that are going into this. And I was hoping you can a cover, you know, what are top diligence areas that many buyers are focusing on? And then B, you know, how does an advisor help triage those requests, and perhaps even pushing back on requests that, are not really meaningful… for the deal to get closed?
Mike
Now, it’s really interesting. It’s a great question. Ryan and I would tell you that, you know, usually most of the broad categories are around sort of revenue quality, customer concentration, contracts and renewals, you know, security posture, key person risk, you know, scalable delivery model among a variety of other things. But, but what, what’s important to note is that there can be great scope creep and diligence just by the number of actors that are involved. So, for example, usually, and we do this on for our buy side clients, we manage collate and analyze diligence information alongside them and on their behalf. So we, you know, kind of know how to run these processes whether you’re selling or buying. But oftentimes when a buyer particularly a funded buyer or a private equity buyer needs a quality of earnings analysis and they bring in an outside audit firm to help them, they’ll ask all the same questions of, you know, without sort of fully understanding the, you know, what’s already been covered by the buyer and that’s not atypical, right? Where we’ll you know, populate a data room. We’ll put everything that the buyers requested in there and it’s not atypical for other parties to come in, whether it’s a tax advisor, or legal advisor, maybe someone doing a quality of earnings analysis to ask the same questions over and over so oftentimes, it can feel a lot like groundhog day. You know, it can feel like, well, yeah, we answered that question five times already and the data’s in the data room. And if you’d go look at the data, you’d have it. But, the new folks that are coming to the process as it continues to grow and mature, don’t have the legacy context for what’s in or what’s out and may not have been shown the data room in a meaningful way. So, there’s a lot of, you know, asking the same question over and over by different parties. And sometimes the questions get answered, you know, slightly differently or even the same questions by the same parties because they either forgot or they didn’t know they analyzed it previously or there was time that went on where they need to refresh the data throughout the diligence process. You know, they need to look at a, you know, fresher set of financial data, or customer data or whatever. And that can be super frustrating, right? And an advisor that knows our way around, does what we call diligence defense and they can guide the buyers in a fairly unemotional way as to where is the data? And it minimizes. The distraction.
Matt
For you, right?
Mike
That’s a huge benefit that advisors bring to the part. And so, when you think about who all has to sign off on a diligence effort, you’ve got a variety of actors from the business that’s doing the acquisition, maybe their financial sponsor, someone looking to do a full quality of earnings analysis, a tax advisor, a legal advisor, and there may be even other strategy advisors that are trying to get their arms around integration teams. And they’re all looking at similar sets of data and probably have similar sets of questions. And so being able to be well organized on your game and working with an advisor that can help remove the redundancy. So you’re not just distracted by it or feeling like it’s a 1,000 cuts is super helpful.
Ryan
Yeah, absolutely. You nailed that well. And if I think about this as well, matt, when we think about some of the areas that people are digging into. And as Mike was mentioning that, where you need defense, what are a few things that CEOS or owners should understand, kind of red flags that you should be aware of that could lead to a retrade or a restructuring of an Loi, that might come up during due diligence?
Matt
Yeah. I mean, a couple of different things I think… you know, first off, and we can’t say this enough that and any good advisor is going to ensure that this is the case, is that the business needs to be humming along, right? It needs to be on an upward trajectory, needs to be sort of meeting general forecast, et cetera. So, you know, that’s critical. But as it pertains to, you know, sort of specific items beyond, you know, the ongoing going concern of the business. You know, things like the cleanliness of contracts, right? That, that is in place. Obviously, we talked on before the, you know, the cleanliness of financials that there are not outliers that are in place that can bring question to the overall data set. And, you know, then, you know, sort of major changes in the business. You know, you aren’t going to all of a sudden shuttle a service line or, you know, something along those lines, you know, the most important part in a diligence effort is, you know, again, I go back to this aspect of practicality, it’s just the facts, ma’am, and, the more that you can have preparation of the data and, you know, the things that I just talked about, contract cleanliness, financial cleanliness, all of those things should be very well prepared, and easily understood. So that there is not a quote unquote perceived risk in the business that is underlying, you know, the data. So, you know, again, it does also go back to understanding the buyer personas and ensuring that you know, what appears to be a good and willing buyer that lines up strategically is indeed the case. Yeah.
Ryan
Great. This has been really great content. Mike and matt for understanding this process again, it feels it can feel really daunting. But once you walk through it, the reward is great. And if you’re running a well run business and you have a lot of your documents in order, it’s a process that can be relatively smooth and you surround yourself with the right people. Mike and matt just kind of last closing thoughts. But if you could give one piece of advice to a CEO heading into due diligence. What would it be? Matt? Why don’t you get us going and pass it over to Mike to end? Yeah.
Matt
I think that this context of momentum, you know, we believe, you know, we work in, you know, the middle, the upper market space, any, you know, well executed due diligence process, you know, should be done in 90 days, and, you know, keeping that momentum throughout the process is absolutely critical. If there’s bubbles in the momentum that are not understood well, then, you know, that’s a red flag and you need to address those red flags, you know, right away, and get those resolved. But keep that momentum, keep the promise of the future of the combined firm and get to that finish line Mike.
Mike
Yeah, I would add that this is a very, this is a, it can be an exhausting phase of the M&A process. And, you know, the M&A journey. It’s been said many times you’ve heard us say it many times, you know, it’s the most unnatural act in business that will feel like that in spades at this phase as you’re going through a due diligence effort. And I think it’s important to not let it become such a distraction that it negatively impacts the business. It’s a, it’s a big risk. And how you mitigate that risk is that you make sure you have a competent advisor that can help you navigate and defend your diligence so that you’re not spending every waking moment trying… to continue to manage and run the business as well as respond in a timely manner to the diligence request, it’s, very challenging for an owner and a small leadership team to respond to all of the diligence requests and the time that a buyer would expect them while running the business and have it not negatively impact the business. And the problem is when it negatively impacts the business during due diligence, you’re setting yourself up for a retrade because the buyer will see softness in your business and they will start to say, well, what’s going on and why is there softness? And we’ve seen two months of revenue going down and, you know, and they’re going to retrade that deal. So it’s a solid investment for you to have a great advisor that can, you know, act on your behalf and diligence defense. And you can keep your eye mostly on the ball. There will be some distractions, right? Because there may be data that wasn’t collected that was asked for or a slice and dice of the data that comes later in the process. And so, there’s enough distractions as it relates to weighing in not only to diligence but also into legal requests from your own team on definitive agreement fortification. So if you can offload some of that or outsource it to your advisor, I would encourage you to do so. And with that, we’ll tie a ribbon on it for this week’s Shoot the Moon podcast certainly appreciate you tuning in and we’ll keep moving through our masterclass on, you know, how to manage and prepare your business for sale in next week’s podcast. And with that, make it a great week.
View all episodes
By EPISODE 245.
Key Takeaways from this episode:
What due diligence is: The buyer’s inspection/audit of the seller’s business to confirm the story, financials, contracts, and assumptions made pre-LOI.
The emotional shift for sellers: Post-LOI can feel like “we’re done,” but diligence is often the most challenging phase and can be exhausting and distracting.
Why buyers do it: Risk mitigation and validation, plus identifying upside (synergies, growth investment opportunities, consolidation savings).
Common seller mistake: Underestimating diligence and showing up unprepared, both emotionally and operationally.
Role of an M&A advisor: First point of contact, ensuring data is clean/defensible, fast response cadence, and pushing back where appropriate.
“Scope creep” reality: Multiple outside parties (QoE, tax, legal, integration) often ask overlapping questions, creating a “Groundhog Day” effect without strong process management.
Top diligence areas buyers focus on: Revenue quality, customer concentration, contracts/renewals, security posture, key person risk, and scalable delivery model.
Retrade risk signals: Business performance softening during diligence, messy financials, messy contracts, or major unexpected changes in the business.
Keep momentum (~90 days as a good diligence window) and don’t let diligence distract leadership so much that performance slips. Revenue Rocket can help prepare you to sell your business from before, start, to finish.
Listen to Shoot the Moon on Apple Podcasts or Spotify.
Buy, sell, or grow your tech-enabled services firm with Revenue Rocket.
EPISODE TRANSCRIPT:
Mike
Hello! And welcome to this week’s Shoot the moon podcast podcasting live and direct from Revenue Rocket world headquarters in Bloomington, Minnesota. We are the world’s premier, M&A advisor to tech enabled services companies with me today, are my partners, Ryan Barnett and Matt Lockhart as we continue our work through our master class.
Matt
Ryan, what? Do you got going there?
Ryan
How’s it going? And, hey, Matt, thanks for joining us here today as well of.
Matt
Course. Great to be here. I know we got another interesting topic, in our series that, you know, we’re getting a lot of good feedback on this master class on, you know, how to maximize the value of your business when you’re ready for a transaction. So let’s keep it going. Yeah.
Ryan
And then thanks for setting that up. Matt and Mike, you know, heretofore what we’ve talked about is getting through that decision of knowing when to sell, getting your house in order, understanding what your firm is worth and what you’re going to take home, we transition that into the process. So working with your team kind of what month one looks like, how you find buyers and… what goes on and indications of interest. Again, it’s an Loi. And then last time we covered deal structures and things like earn outs and selling out. So today, if we follow that logical progression and you think from the start of a process to where we’re at now the deal terms have been struck in an Loi, and what happens after that, in nearly every case, at least that I’ve seen is that we move into a due diligence process. And Mike, I will just get us started with an easy question here. But what is due diligence and what does it mean for buyers and sellers when we get to this point and just help define due diligence to start?
Mike
You bet Ryan. So due diligence is really the buyer initiating an inspection of your business. If you’re the seller to confirm what you’re saying about your business is actually correct, and what you’re saying as it relates to your financial data, your legal data as it relates to your contracts, etc, so that they understand that what they’re buying, any assumptions they made in analyzing your business in preparation for the Loi, are in fact proving out to be the case. And so, you know, what happens is the buyer sort of shifts from the excitement to, hey, you know, this one plus one really equals three or four to risk mitigation, right? Diligence is designed to surface risk and in some ways price it in. If there’s things that were unforeseen in there that are discovered in their analysis. So the volume of review and questions about the business and requests about the business and its documentation, particularly financial and legal turns to much like an audit of the business. And there’s a big emotional shift for sellers because, you know, all diligence efforts are challenging because there’s you know, requests from a buyer for things that you may not have looked at in some time and your ability to be prepared and to be able to answer.
Matt
Confidently and.
Mike
to hopefully have worked with a good advisor helping you come to market and doing pre diligence work has been put in place to minimize your distraction as you continue to run the business moving forward? Yeah.
Ryan
Mike, that’s a great setup. You know, we do both buy side work and sell side work here. And we’re first in understanding what that diligence request can look like as well as helping people defend those requests. And I tell you we coach people from day one, that first request is pretty daunting. And so it looks like a lot. And in reality, when you’re going to market and going through a process and you have an advisor by your side, this process can be a little less daunting if you’re tackling it, but it does feel like a lot. Matt, if we think about this in like real world practice and you think about technology tech services firms, and MSPS, csps, and app development firms, you know, what’s the biggest mistake sometimes these firms have when they’re starting that diligence process.
Matt
Yeah, I think the, you know, Mike touched on the emotional aspect of it, you know, it’s high emotion to enter any process that you are looking at to transact your firm. And then, you know, you get to that Loi stage and you feel like, hey, somebody is really interested in this business. This is done, right? And they minimize, you know, the due diligence process, they minimize the risk that occurs in the due diligence process. And quite honestly, oftentimes, if they are not working, you know, with a good advisor, they are unprepared for the due diligence process. So, the biggest mistake is both emotional, right? In the context of thinking, you know, once a LOI is signed, you know, this is going to be easy and then practical in that they, you know, simply are not prepared for, you know, the audit and inspection, you know, that is forthcoming. So, you know, and this isn’t the case with, well, any of our clients. But I was reading an article just last night about uncle nearest whiskey. And this is like the hottest whiskey on the market. You know, three years ago, the founder, you know, valued the business at a 1,000,000,000 dollars, well after inspection. You know, it looks like they’re about a break even company if not less. So you got to kind of make sure that you put your, you know, you put your yourself in the eyes of a buyer who needs to ensure that what they have been promised is true. And the more organized and practical that you can make that due diligence process without emotion, you know, really the better.
Ryan
And having your, that’s such a great point what a buyer’s trying to do here is validate, and the seller’s trying to kind of prove and sometimes that leads to a mismatch in what’s being acquired. Mike, I guess the question here jumps a little bit off of what we were talking about earlier, but how do buyers end up using the results of due diligence? Then in the case that I heard with matt, I heard perhaps different deal terms, but what else do buyers utilize the results for?
Mike
Well, it certainly can, you know, could mean different deal terms, but it also, you know, emphasizes where a buyer may need to invest in the business to further grow it or to further realize their return. For example, there may be an opportunity to invest in further sales and marketing resources to, you know, accelerate growth or there may be an opportunity to get consolidation savings with an existing operation, particularly if the buyer is either a strategic buyer running a similar business albeit larger or, you know, someone who has outside capital in a strategic business where there can be some savings when they combine the businesses and those synergies or those savings usually go to the buyer, right? So validating where there’s opportunities for, not only, you know, maybe chinks in the armor in your own business, but also where there’s synergy opportunities. And discussing those synergies with you ahead of time are all things that impact their return rate, right? And they’re going to want to make sure that they have clarity around all of those things to make sure that they can get the, you know, the highest return for their investment. So when you think about risk, you know, yes, risk is certainly a component of mitigating risk and understanding risk. But also the upside potential of the combination is something that, you know, people certainly focus on in diligence.
Ryan
Yes, and even some of the outputs on that might be extreme clarity around an earn out. So, last week, we talked about deal structure and part of the LOI is going to be perhaps high level on an earn out. You have to hit xyz revenue and xyz time to get xyz result. And so due diligence also can have some results to your point. If you have the opportunity to capture upside that can happen, you can also have business improvement during that time. If you’re an extreme growth, businesses can be a great time for a buyer or for a seller to really perform well to the point where you have to take another look at what that deal looks like. If we’re in this process and we’re aiding sellers. Matt… you know, what’s the role of an advisor during that? You know, where do other us or someone else? How does an M&A advisor come into play during this part of the process?
Matt
Yeah, I mean, if you know, it’s probably a good debate class on… what is more important in the role of an advisor to get to a LOI with the right party or to successfully move through the diligence process to close, you know, with the right party. So a good advisor is really, you know, side by side and taking on the role of first point of contact for all diligence related items. And you know, as you know, it’s sort of the old Mary poppins saying, well begun is half done. A good advisor is going to ensure the cleanliness of all the data that it is in line with… the story that’s been told towards the LOI. There’s cleanliness in terms of the chart of accounts, obviously, the PL and the balance sheet and, et cetera. So the advisor is going to make sure that going into the due diligence process, everything is well understood. It is absolutely defensible against the expectations of a buyer. And then, you know, obviously, there’s need for clarification throughout the due diligence process. And the advisor, is ensuring that there’s a very quick response. Now, in addition to that, you know, as we’ve talked about in the past, there’s always nefarious actors in the marketplace who are attempting to, you know, have a history, of bait and switching or re trading, and they, you know, they work towards getting somebody under LOI, you know, with the knowledge that they’re gonna try to reduce the purchase price, you know, come hell or high water. And part of the advisor’s job is to ensure and understand where there’s indicators that could impact the eventual transaction price. So the advisor is absolutely critical, should be very forward in the process. Should be very well organized and, you know, ready to get your elbows up if need be during the due diligence process.
Ryan
It’s really well said, I think that what we lead from due diligence, and part of what’s in our next podcast we’ll be covering too is, the crafting of those definitive agreements to your point that they, these coincide together and can flow from one kind of process to the next. It’s a, having a con, continuity throughout starts to become critical for the success of a deal. Mike, I’m gonna go back to a little topic here and, you covered this a bit, and I just wanted to make sure that we’re addressing this or the sellers really understand kind of what firms are looking for. So, you know, it seems like the list always explodes like we start out small, then it’s if we dig up, we find a little bit more and we find a little bit more. And then there’s just a lot of different areas of focus that are going into this. And I was hoping you can a cover, you know, what are top diligence areas that many buyers are focusing on? And then B, you know, how does an advisor help triage those requests, and perhaps even pushing back on requests that, are not really meaningful… for the deal to get closed?
Mike
Now, it’s really interesting. It’s a great question. Ryan and I would tell you that, you know, usually most of the broad categories are around sort of revenue quality, customer concentration, contracts and renewals, you know, security posture, key person risk, you know, scalable delivery model among a variety of other things. But, but what, what’s important to note is that there can be great scope creep and diligence just by the number of actors that are involved. So, for example, usually, and we do this on for our buy side clients, we manage collate and analyze diligence information alongside them and on their behalf. So we, you know, kind of know how to run these processes whether you’re selling or buying. But oftentimes when a buyer particularly a funded buyer or a private equity buyer needs a quality of earnings analysis and they bring in an outside audit firm to help them, they’ll ask all the same questions of, you know, without sort of fully understanding the, you know, what’s already been covered by the buyer and that’s not atypical, right? Where we’ll you know, populate a data room. We’ll put everything that the buyers requested in there and it’s not atypical for other parties to come in, whether it’s a tax advisor, or legal advisor, maybe someone doing a quality of earnings analysis to ask the same questions over and over so oftentimes, it can feel a lot like groundhog day. You know, it can feel like, well, yeah, we answered that question five times already and the data’s in the data room. And if you’d go look at the data, you’d have it. But, the new folks that are coming to the process as it continues to grow and mature, don’t have the legacy context for what’s in or what’s out and may not have been shown the data room in a meaningful way. So, there’s a lot of, you know, asking the same question over and over by different parties. And sometimes the questions get answered, you know, slightly differently or even the same questions by the same parties because they either forgot or they didn’t know they analyzed it previously or there was time that went on where they need to refresh the data throughout the diligence process. You know, they need to look at a, you know, fresher set of financial data, or customer data or whatever. And that can be super frustrating, right? And an advisor that knows our way around, does what we call diligence defense and they can guide the buyers in a fairly unemotional way as to where is the data? And it minimizes. The distraction.
Matt
For you, right?
Mike
That’s a huge benefit that advisors bring to the part. And so, when you think about who all has to sign off on a diligence effort, you’ve got a variety of actors from the business that’s doing the acquisition, maybe their financial sponsor, someone looking to do a full quality of earnings analysis, a tax advisor, a legal advisor, and there may be even other strategy advisors that are trying to get their arms around integration teams. And they’re all looking at similar sets of data and probably have similar sets of questions. And so being able to be well organized on your game and working with an advisor that can help remove the redundancy. So you’re not just distracted by it or feeling like it’s a 1,000 cuts is super helpful.
Ryan
Yeah, absolutely. You nailed that well. And if I think about this as well, matt, when we think about some of the areas that people are digging into. And as Mike was mentioning that, where you need defense, what are a few things that CEOS or owners should understand, kind of red flags that you should be aware of that could lead to a retrade or a restructuring of an Loi, that might come up during due diligence?
Matt
Yeah. I mean, a couple of different things I think… you know, first off, and we can’t say this enough that and any good advisor is going to ensure that this is the case, is that the business needs to be humming along, right? It needs to be on an upward trajectory, needs to be sort of meeting general forecast, et cetera. So, you know, that’s critical. But as it pertains to, you know, sort of specific items beyond, you know, the ongoing going concern of the business. You know, things like the cleanliness of contracts, right? That, that is in place. Obviously, we talked on before the, you know, the cleanliness of financials that there are not outliers that are in place that can bring question to the overall data set. And, you know, then, you know, sort of major changes in the business. You know, you aren’t going to all of a sudden shuttle a service line or, you know, something along those lines, you know, the most important part in a diligence effort is, you know, again, I go back to this aspect of practicality, it’s just the facts, ma’am, and, the more that you can have preparation of the data and, you know, the things that I just talked about, contract cleanliness, financial cleanliness, all of those things should be very well prepared, and easily understood. So that there is not a quote unquote perceived risk in the business that is underlying, you know, the data. So, you know, again, it does also go back to understanding the buyer personas and ensuring that you know, what appears to be a good and willing buyer that lines up strategically is indeed the case. Yeah.
Ryan
Great. This has been really great content. Mike and matt for understanding this process again, it feels it can feel really daunting. But once you walk through it, the reward is great. And if you’re running a well run business and you have a lot of your documents in order, it’s a process that can be relatively smooth and you surround yourself with the right people. Mike and matt just kind of last closing thoughts. But if you could give one piece of advice to a CEO heading into due diligence. What would it be? Matt? Why don’t you get us going and pass it over to Mike to end? Yeah.
Matt
I think that this context of momentum, you know, we believe, you know, we work in, you know, the middle, the upper market space, any, you know, well executed due diligence process, you know, should be done in 90 days, and, you know, keeping that momentum throughout the process is absolutely critical. If there’s bubbles in the momentum that are not understood well, then, you know, that’s a red flag and you need to address those red flags, you know, right away, and get those resolved. But keep that momentum, keep the promise of the future of the combined firm and get to that finish line Mike.
Mike
Yeah, I would add that this is a very, this is a, it can be an exhausting phase of the M&A process. And, you know, the M&A journey. It’s been said many times you’ve heard us say it many times, you know, it’s the most unnatural act in business that will feel like that in spades at this phase as you’re going through a due diligence effort. And I think it’s important to not let it become such a distraction that it negatively impacts the business. It’s a, it’s a big risk. And how you mitigate that risk is that you make sure you have a competent advisor that can help you navigate and defend your diligence so that you’re not spending every waking moment trying… to continue to manage and run the business as well as respond in a timely manner to the diligence request, it’s, very challenging for an owner and a small leadership team to respond to all of the diligence requests and the time that a buyer would expect them while running the business and have it not negatively impact the business. And the problem is when it negatively impacts the business during due diligence, you’re setting yourself up for a retrade because the buyer will see softness in your business and they will start to say, well, what’s going on and why is there softness? And we’ve seen two months of revenue going down and, you know, and they’re going to retrade that deal. So it’s a solid investment for you to have a great advisor that can, you know, act on your behalf and diligence defense. And you can keep your eye mostly on the ball. There will be some distractions, right? Because there may be data that wasn’t collected that was asked for or a slice and dice of the data that comes later in the process. And so, there’s enough distractions as it relates to weighing in not only to diligence but also into legal requests from your own team on definitive agreement fortification. So if you can offload some of that or outsource it to your advisor, I would encourage you to do so. And with that, we’ll tie a ribbon on it for this week’s Shoot the Moon podcast certainly appreciate you tuning in and we’ll keep moving through our masterclass on, you know, how to manage and prepare your business for sale in next week’s podcast. And with that, make it a great week.