building Your
diligence team
Diligence requires a team effort. Here are the essential roles of any diligence team:
The Diligence Team, Assembled
Building your diligence team is like being in the first 20 minutes of a heist movie. You’re recruiting people from inside and outside of your organization with specialized knowledge and experience to tackle the diligence process. With rare exceptions, going it alone is not advisable. While we tend to think that bringing on external advisors in some of these roles is the way to go, how you construct your diligence team is, of course, ultimately up to you. But there’s real value and capacity to be had in building the right team.
Generally, you’ll include some combination of CEO, CFO/controller, and COO from your team. These individuals will be pulling most of the information and responding to diligence requests. Some questions to consider when bringing someone from your own team into the diligence process:
Who should be involved in the process?
Diligence takes up significant time. What else is on his/her plate? What concerns will he/she have? How can I best bring them into the process?
What will he/she be accountable for in the diligence process? Any anticipated gaps?
We still want to keep the circle of trust small. Can I trust this person to maintain confidentiality? Who will he/she be able to rely on as a resource?
Rounding out internal recruits, what roles do you want to fill with outside advisors and how are you going to recruit those people?
Intermediary
Intermediaries are typically paid a percentage of the sale and provide two primary services: making the market and/or managing the diligence process on behalf of the owners. A third service line, most commonly offered by “M&A Advisors” specifically, may include operational prep for sale. As the owner, you can define the scope of work you are interested in compensating them for (i.e. if you already know who you want to do a deal with, you can hire them only to support diligence).
Specific to diligence, the quarterback will be in charge of the overall process and moving along the business deal, which involves both information gathering and relationship management. But those roles can be split. Perhaps you as a seller are managing the relational side and the progression of the business deal, while you have an intermediary who’s in charge of managing the diligence data room. Diligence is an administrative burden, and intermediaries are used to the process and expectations
Some questions to ask an intermediary:
What types of businesses do you typically represent? To whom have those businesses ended up selling?
Specific to diligence, what services do you provide?
What does your fee model entail (e.g., straight percentage on a deal, retainer, Lehman Formula)? And how do you define “consideration” (value in the deal)?
At the end of the day, you as the individual seller are the decision-maker. You’re the primary negotiator of the business deal and the one responsible for weighing tradeoffs. So, you need to be the quarterback of your own deal from a relational and a business deal standpoint. Everyone that’s working with you is doing so on your behalf and in your best interest. The bottom line? Make sure you assemble enough people with great expertise to provide insight to you and extend your capacity, but do not delegate judgment.
Tax Advisor
When you sell a business as an owner, certain percentages of the value of the business are going to get allocated to different things, which have varying tax consequences – what counts as capital gains versus ordinary income, equipment versus. goodwill… Said differently, things can get complicated. You want a dedicated tax advisor who advises on proceeds allocations for the purposes of reporting to the IRS and for thinking about where the money should ultimately end up. These decisions have personal consequences, but they also impact how allocations within the business deal.
M&A Attorney
If you’re doing a deal for the first time, you probably don’t have any experience working with an M&A lawyer. And, you might think that a general business or personal attorney can take on that role. But purchase agreements are different beasts – you want to work with someone who will understand the nuances of how a business deal is translated into a legal deal. So how do you source an M&A attorney? How do you qualify them? What are the typical fee structures that an M&A attorney would use?
Example Permanent Equity Diligence Team
While you’ll know best how to build your team, here’s an example buyside team that you might work with if we were diligencing you. Specific roles and overall team depth are dependent on individual deal dynamics. At Permanent Equity, we try to assign operational diligence to those most likely to materially support the team post-close, so their involvement also functions as an operational ramp up.
