As far too many founders have learnt the hard way, getting an offer letter is no guarantee of closing a deal. As exciting as the process is, those investors can disappear just as quickly as they arrived. By being adequately prepared for the due diligence phase, that risk can be minimised.
After years of (literally) blood, sweat and tears, an offer is on the table for your business. Whether you are selling the entire thing or just a portion of your shares, the offer letter is really only the start of the process.
Yes, the worst is ahead of you. Sorry for the bad news. Luckily, if all goes well, there is a significant pot of gold at the end of this…rainbow?
The rainbow isn’t fun and colourful
A due diligence process is no joke whatsoever. Fraught with danger and questions that will feel more invasive than your annual check-up at the doctor, being able to navigate this process is the difference between success and failure in selling a business.
Nobody really knows how many deals fail at the due diligence stage. At best, we have the results of surveys to fall back on. If that doesn’t work, the internet is full of invented statistics anyway.
From our own experience though, we do know that it’s about 50-50 once the offer letter is on the table.
Here Be Dragons – or not
Interestingly, this is corroborated by statistics from the Dragons’ Den TV series in the UK. Over the first eleven seasons, 143 deals were verbally completed in the den and only 76 actually went through.
Is this because the Dragons are frauds, or because they get cold feet? No, probably not.
It is likely that these entrepreneurs simply weren’t anywhere near ready to raise capital. Dragon’s Den is particularly geared towards early stage investments, so that makes it even more unlikely that the plucky founders were truly ready for investment.
Preparation. Preparation. Preparation.
These are the three Ps of dealmaking. If there was a fourth P, you could surely guess what it would be.
If you’ve never been through a due diligence (or possibly even heard the term), then how do you know what is coming? This is where you need to lean on experts who have been through this process.
For example, how empowered are you feeling right now to deal with questions like:
- What succession plans do you have in place?
- Can you internally fund your desired growth strategy?
- What earn-outs are you prepared to agree to?
- How will your senior managers be engaged going forward?
- Do you understand your total addressable market?
Not so easy, is it? A due diligence is about more than rocking up at your offices to see if the receptionist took an early lunch.
Get ready for bizval bootcamp
At bizval, our passion is bringing corporate finance skills to the section of the market that needs them most: SMEs.
Too small for the investment banks and far too big to be ignored, these businesses are the lifeblood of any economy. They are built by talented entrepreneurs who take immense risks along the way, often devoting their lives to these projects.
We have nothing but respect for that process, as we are on a similar journey ourselves.
Working with founders is what we love most, especially when we can help prepare them to run the gauntlet. In launching bizval bootcamp, our goal is to help founders understand where the pressure points will be in a due diligence.
Through a detailed assessment of the business across all the major focus areas for an investor, our goal is to put you on the front foot when you talk to investors.
Keep an eye out for further updates about our bootcamp offering. In the meantime, you should make time to watch the recording of our last webinar that dealt with some of the trickier concepts that come up in a due diligence. We were joined by Andreas Tsangarakis of STBB and Matt Smith of CleverProfits for this discussion: