Achieving a strategic succession starts with due diligence, done early. The discovery process determines the current value of a business and if internal value drivers are broken. This is what we call pre-due diligence.

Imagine for a moment that someone hands you a map, but you don’t know where you are.  A map will not be much good if you don’t know where you are to begin with.  Pre-due diligence is about finding out where you are financially both business wise and personally; and then, building a plan with priorities mapped out, to enhance the company’s value so you get where you want to be when a purchase offer occurs. A business owner who incorporates pre-due diligence into normal business operations, and well in advance of offering the business for sale, is building value, is better organized and more prepared for a sale offer. 

 Due Diligence vs. Pre-due Diligence?

The process by which a prospective buyer of a business conducts a legal, financial and general business operation investigation in preparation for a possible purchase transaction is due diligence.

Pre-due diligence is an early seller-side discovery done well before entering a potential transaction. Ideally -- years before. This analysis tells the owner what the value of their company is and identifies any broken business drivers or risk factors. This process should include a personal financial review for a complete picture. Really – a big picture view built on details.

To start the process of pre-due diligence means one needs to begin collecting documents from several different sources.  This is often time consuming and usually frustrating for most professionals, which is why many don’t do it.

The benefit of early pre-due diligence is that a business owner will have the time to enhance the value of the company by fixing what’s wrong and de-risking their business. Most importantly, it gives the business owner a reality check into their biggest potential asset, their business. Additionally, done properly, it answers the question, how much money would I have if I sold right now? The answer is your current personal net worth plus business value. The owner can consider how much money they need or want to to retire or exit with and work towards building value to achieve that goal.

Pre-due diligence how-to

The gathering of critical information can be tedious and stressful so having expertise to lead the process will allow the owner stay focused on running and growing their enterprise. Engaging an advisor who will work to understand the owner’s situation in business and life, and who has a network of trusted exit advisory specialists at hand, can take an otherwise potentially painful experience and turn it into a profitable and rewarding one.

How we do it

Strategic Succession’s Central Document Registry (CDR) facilitates the discovery process of pre-due diligence. It’s where we create a cloud-based file, like a data room, that the client owns. For example, each entity (OpCO, HoldCO, Personal) has its own file room. This hyper-organization tool allows us to view all documents at a glance; determine what is missing, where conflicts exist and what areas need attention. For the client and other collaboration advisors, this saves money and time.

The CDR file will contain business-critical documents like:

  • organizational chart

  • company history

  • customer and supplier relationships

  • intellectual property

  • contracts, leases, bank lines of credit

  • financial statements (5 years)

  • corporate tax returns and assessments

  • key personnel

  • inventory of business processes, systems, license agreements

  • capital asset summary

  • strategic plan and personal financial plan

  • personal net worth (without the business value)

  • family genogram

  • wills, insurance, etc

The pre-due diligence process takes time and costs money, yes. But it is a smart and profitable first step towards a successful outcome for your eventual exit. Results include deeper insights into the business, time to build maximum value and de-risking the business (and therefore the owner’s life). Then, when the time comes, a transition to sale or succession can be more likely structured the way the owner wants. Business owners who delay pre-due diligence risk are not maximizing the value of their business and leaving money on the table.

Contact John and set up a time to talk about your next step.