How can you ensure due diligence is done right during the exit process?

Often it makes sense to have more than just one exit option. Such "dual-track exit" refers to a strategic in which a startup simultaneously pursues multiple exit paths: preparing for an initial public offering (IPO) while also engaging in discussions with potential acquirers for a sale (or preparing for another financing round). Why might such a process make sense despite the obvious complexity? Well, it gives the startup flexibility and this is especially valuable in times of volatile capital markets. Imagine you have gone through the long process of preparing an IPO and shortly beforehand, an external shock causes a difficult market situation that makes a successful IPO unlikely. In this case, a plan B is worth its weight in gold.

In due diligence, assess financial projections for realism and align the company's valuation with market expectations. Thoroughly understanding the business model's viability and operational efficiency is essential. Cultural alignment with potential acquirers or investors is crucial to avoid post-deal integration issues. The management team's responsiveness and transparency during the due diligence process are key indicators of potential underlying issues. Be cautious of a company’s over-reliance on specific market conditions or events, as this can pose risks to stability and growth. Carefully addressing these factors ensures more informed and secure investment decisions.

When you’re selling your company you will represent and warrant about literally every conceivable aspect of your business. If you’re wrong, and especially if you hide something, you will breach the contract and in almost all instances some portion of the price will be held back or escrowed by the buyer for this purpose. Conversely, by being fully transparent during due diligence not only will you earn credibility with the buyer, chances are you can resolve the problem pre-closing. And if you can’t, while you’ll be on the hook to indemnify the buyer for any issue that arises - you won’t be on the hook for fraud or intentional misrepresentation (always a bad, punitive and expensive outcome for sellers).

Understanding the nuances of 'lock box' vs 'completion accounts', navigating a detailed warranty and indemnity / disclosure process (including a default 7 year tax indemnity, in the UK at least), negotiating earn out, deferred considerations or share swaps will almost certainly be beyond a founder. The SPA (sale and purchase agreement) is a complex and challenging set of documents and navigating / negotiating this without legal support is 'brave' indeed.

While price always matters, if you’re selling to private equity, fit and culture matter even more. Why? Because you’ll almost always have some skin in the game when you exit your business, whether in the form of rollover equity, an earnout, a meaningful post-closing employment package, possible second bite at the apple down the road, or combination of the foregoing. The better your post -closing alignment with that of an acquiring PE, the better the likely long run outcome for you financially, your happiness, and your overall well-being. Too many founders focus too much on up front closing money when selling to PE, and not the holistic financial and lifestyle package.

Hire experts, legal, accounting and financial, who have been through it many times, know how to package it accordingly to prospective acquirers, who head off issues, and who know where and how efficient, correct and thorough due diligence (and what matters to buyers) will net you $$ at the closing instead of inadvertently costing yourself money. Trust me it’s worth the cost having advisors who are specialists.