Due Diligence

In non retail businesses, often times there are key clients and suppliers on whom the company relies heavily for its revenue which was the subject of the January 31st blog post, and has elicited quite a few inquiries from buyers.

That post discussed possible deal options a buyer can utilize to protect their interests. As a follow up, I want to review how to possibly alleviate any concern regarding these two situations when buying a business.

This is specifically related to customers who represent a disproportionate amount of a company’s revenues, or a supplier whom the business relies on to the bulk of its services or products.

Above all, a buyer needs to understand that a seller will rarely allow complete and total access to either of these two groups without a bona fide agreement in place to sell the business. Furthermore, many sellers may be apprehensive to do so even with an agreement in place until such time as all other deal contingencies have been satisfied. Others still won’t allow it at all.

Obviously, for a buyer to move forward with a purchase when these scenarios exist can potentially label a deal to be overly risky and thus the reason why many deals with these issues never get to closing.

First and foremost, a buyer needs to have a mechanism in place that ties part of the purchase price to the continuity of these relationships commensurate with their significance to the business. In other words, if one major client represents forty percent of the company’s revenue and/or profit for example, then obviously one would want to see a similar percentage of the purchase price in a performance-based structure to this client’s continued business.

The second aspect however is having the opportunity to meet with these key clients and suppliers before closing. Let me remind you this will be a delicate situation, and do not expect any seller to agree until they know this will be the last hurdle before finalizing the deal. You may have to get a little creative on this front. I have found that having a seller introduce you as either as sales trainee or even a potential investor can be a workable situation, but again, it is something that a buyer needs to work out with the seller.

With suppliers, this is something the seller will ultimately have to disclose to them and so it should be a simpler situation to address. While a buyer cannot expect any supplier to give an unconditional guarantee that they will continue the relationship to perpetuity, you simply want assurances that should the business continue to perform at similar levels after you takeover, the supplier sees no reason to not continue the relationship.

While there may be a contract in place between the company and supplier, and even if this agreement will transfer to the buyer, typically these can be cancelled with a very short notice period and so they do not provide much in the way of security.

If there are agreements in place with clients, the fact is that either party can usually extract themselves easily – if someone wants to stop buying, there is usually not much you can do.

And so, whether dealing with suppliers or clients when buying a business, the key is to determine if you have the ability to keep the other party happy and provide the same level of service and or support that the prior owner did. Generally, when you are able to do so, you will have no issues with either party and the only time you will have to revisit the issue again is down the road when you decide to sell the business and the prospective buyer airs the same concerns you have. At that time, you will clearly understand why the prior owner may have been so hesitant to allow you to meet with either of these parties.

On Wednesday, we are conducting the final free webinar in the five-part series we have done with Guidant Financial. This week’s topic is Due Diligence When Buying A Business. The participation and feedback has been extraordinary from the first four events and I highly recommend that you join us. To learn more click here


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