Becoming a Better Business Broker Day 16: Due Diligence Mastery

Welcome back to Becoming a Better Business Broker in 30 Days!

This concise series title describes exactly what we hope you get out it - becoming a broker that can close more deals with less work.

Yesterday we covered Developing Your Personal Brand as a Business Broker - make sure you check it out.

Today we're discussing the last big hurdle of a deal - due diligence. Specifically how you can master due diligence to increase the likelihood of a deal closing.

Understanding Due Diligence

As we all know, Due Diligence (DD) allows potential buyers to 'fact-check' the business before legally buying the business.

Due diligence can create a bit (or a lot) of anxiety for brokers who feel DD is out of their control. What if we told you those brokers were wrong?

While yes, you can't control all the issues that emerge in DD, you can control the 3 key stages of Due Diligence. These stages include:

Preparing for Due Diligence
Create a Due Diligence Bulletin Board
Become a Document Hound 🐶

your role is to facilitate this process, ensuring that it's thorough, efficient, and transparent.

Stage 1: Preparing for Due Diligence

This is the most important stage of Due Diligence that 90% of brokers mess up (we are guilty of this as well 😬).

What is it? It's preparing a business for Due Diligence before your CIM is presented to a buyer. Unfortunately, all too many of us will skip this step to not delay getting a deal out the door - only to pay for it later when avoidable issues arise in DD:

Oh, your Seller doesn't have contracts with any of their employees?
Oh, your Seller hasn't paid taxes for the last 3 years?
The lease agreement expires next year? What's that? Oh yes, that's a massive dollar per square feet price increase because the landlord gave the Seller a rent deal during COVID.
The Seller tried to re-finance the commercial property but the environmental assessment came back with contamination so the real estate is not eligible for financing.
The Seller's brother is on America's Most Wanted List? And is technically still registered as a part-time employee?

All these things, and more, can get 'pre-exposed' by putting on your Buyer's hat and getting a Seller to pre-populate a data room.

Analysing the uploaded documents will take intellectual honesty - what red flags do you notice? And what is the impact? Is it a deal killer? Impact the asking price? Makes the buyer pool smaller? Leverage these insights to plan out your marketing strategy for the listing.

Sounds like a lot of work? You're correct. Fortunately, with DealBuilder, you're able to build DD templates and checklists to make this stage a breeze.

You also need to educate your Seller on the importance of this step. Not only will it save their future self a lot of time - it could save them a lot of money (from having a deal close rather than dying at the 11th hour).

Stage 2: Create a Due Diligence Bulletin Board

Building a deal bulletin board is another step that requires effort but drops the cortisol levels of everyone on the deal.

What is a deal bulletin board? Well, it consists of 2 parts:

An email thread introducing both the Buyer + Seller's accountants, lawyers, and bankers (in addition to anyone else relevant to the deal). Your first email should state all key dates in the DD process (condition removal dates, target closing dates, end of diligence period, etc.).
A Due Diligence checklist - best practice here is a Google Sheet (that can be maintained and updated online in real-time) with all the Buyer's due diligence requests additional to your data room.

Here is an example of a template of what the Google Sheet template can look like.

Want a copy of the Due Diligence Request List template? Send us an email to support@dealbuilder.co with the subject line: Due Diligence Checklist Template.

Stage 3: Become A Document Hound 🐶

At the end of the day, the effectiveness of your Deal Bulletin Board falls on your shoulders. The other deal professionals are busy and your clients may have never done a deal before.

For a Seller, the idea of a Buyer doing a deep dive into their business financials, and operating procedures, and interviewing their employees is about as appealing as an enema.

As such, stay proactive and consistent in your communication with each deal team. Keep everyone in the loop (don't forget to CC), send reminder emails about key dates, and become a document hound for your Buyer. Meaning, that you will call, text, and email your Seller relentlessly about key documents that need to be added to the data room. Your Seller may start to hate you, but like telling your kid that getting a neck tat in High School isn't a good idea, they will thank you later.

Becoming a Deal Hound gives the Buyer the confidence you have their back, giving them the trust you need to work more closely together when inevitable 'speed bumps' arrive in Due Diligence.

Conclusion: The Art of Due Diligence

Mastering Due Diligence is a critical skill for any business broker. It helps close deals more efficiently and builds your reputation as a thorough and reliable broker. By effectively managing all 3 stages of Due Diligence - you can increase the likelihood of a successful deal closing.

Stay tuned for Day 17, where we'll explore Working Effectively With Accountants.