Due diligence is an umbrella term that describes what business buyers do before they close on any transaction. Typically, the entire due diligence checklist can have 200-300 items on it and often these questions are segmented by operational department.
When selling a business, most owners are prepared for tough questions about their IT systems, HR and hiring practices, the backgrounds of key employees, contracts with clients and suppliers, and ultimately the continuity of the business post close.
However, one area that far too many business owners do not spend adequate time preparing for prior to due diligence is the optimization of their sales organization. Why does this matter? Because more and more buyers are drilling deeply into the sales process to determine how valid the projections are regarding future growth.
Ultimately, this is what drives the value of the company (buyers are buying your future, not your past). Determining the longer-term viability of the sales forecast, essentially by looking at it from the ground up, is becoming ever more critical.
A recent article on the Axial network written by David Winkle, Founder and President of Peak Performance Sales Solutions, is very informative on this topic, as it is written from a buyer’s perspective.
One of most important lead measures of future revenue is the sales forecast, which is typically derived from the company’s Customer Relationship Management (CRM) tool. If the CRM is set up correctly and used consistently by the sales team, the software will generate a revenue forecast by adding up the estimated revenue size from all the deals in the pipeline and assigning a probability and close date.
Now in a perfect world, every sales person in your organization would (on a daily basis) update their clients/prospects in your CRM by assigning dollar amounts to each potential transaction, probabilities, and closed dates.
In the real world, we all know how tough that is to get done. However, what will impact you most in due diligence is if you simply project your historical compound annual growth rate for the next five years.
Although that may prove to be true, the reality is, buyers want to be able to quantify the probability/likelihood of future revenue, especially by key clients. If you are simply guessing or estimating, this will come up in due diligence and may scuttle your deal.
Remember this: Buyers hate risk.
The more you can reduce risk, the better your deal structure will be and so, too, the likelihood of the deal actually closing. As part of your business exit strategy, train your sales staff to use some sort of predictive sales modeling tool long before you enter due diligence. It doesn’t have to be rocket science, just defensible. And fairly accurate.
Don’t assume buyers will “trust your gut” when it comes to forecast revenue. The more granular you can get, the better. Definitely forecasting by key clients is important, but also doing so by your major markets is critical.
To learn more about the entire exit planning process and to dive deeper into the due diligence process, please call us at 972-232-1121 or visit our website, provide us with your contact information and we will be in touch to discuss your specific situation as well as give you details regarding our educational M&A conferences. To learn more, follow these links:
By Carl Doerksen, Director of Corporate Development at Generational Equity.
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