Move guide
Find the problems before a buyer does
Your report suggested a move on at least one of these three questions:
- whether you know the true downside a buyer will model, and can defend against it;
- whether you know the red flags due diligence could raise, and are ready to answer them;
- whether the risks the other due diligence streams will find are dealt with.
This move guide runs the buyer's downside case yourself, as named events. Then it lists every flag due diligence will raise and gives each one an answer, before a buyer's advisers find it.
1. When it applies
Use this move guide if your report placed any of these questions at "Red flag" or "Doubtful".
| Question | Where it may sit today | Where this move guide aims |
|---|---|---|
| Do we know the true downside a buyer will model, and can we defend it? | Red flag: "We have never run it; a buyer's downside case would wipe out the price we expect." Doubtful: "Our “low case” still shows growth; the real downside hasn't been faced." |
Supported: "The downside is quantified, with the mitigations and evidence that keep the price defensible." |
| Do we know the key red flags DD could surface, and are we ready to answer them? | Red flag: "The obvious flags (an unhappy large customer, contracts lapsing, a forecast miss mid-process) are live and unaddressed." Doubtful: "We haven't listed them; a buyer's advisers will find them before we do." |
Supported: "Each likely flag has a prepared answer (fixed, evidenced away, or disclosed with context) and trading is protected through the process." |
| Are the key risks, including those the other diligences will surface, dealt with? | Red flag: "We know of issues (earnings quality, contracts, compliance, capacity) a buyer's advisers will find, and they are being explained away." Doubtful: "We haven't looked; whatever the financial, legal or operational DDs find will be news to us too." |
Supported: "Findings from each DD stream identified, commercial impact assessed, each with a fix, disclosure or price stance and an owner." |
If all three already sit at "Supported" or higher, skip this move guide.
2. What to do
Five steps. They take six to ten weeks.
- Build the downside a buyer will model as named events, not a percentage cut. Quantify each, and write the mitigation and the evidence. Table A below records it.
- List the flags due diligence will raise: an unhappy large customer, contracts lapsing, a forecast missed mid-process.
- Give each flag one answer: fixed, evidenced away, or disclosed with context.
- Run vendor due diligence across the financial, legal, tax and operational streams. Assess the commercial effect of each finding.
- Fix or disclose each finding, with an owner, before a buyer's advisers find it.
3. What to produce
One table.
Table A. The downside and the flags
| Named event or flag | Effect on earnings ($) | Answer: fixed, evidenced or disclosed | Evidence in the data room | Owner (name) |
|---|---|---|---|---|
A flag with no answer is the first thing a buyer will price.
4. A worked example
Illustrative. Written for this move guide. It describes no client.
A plumbing-supplies wholesaler is preparing for a sale.
The downside.
- The team named three events instead of cutting the plan by a percentage. They were the loss of the second-largest customer, a building downturn and a rise in freight costs.
- Each had a number and a mitigation. The building downturn had already happened once, and the record showed how the business held up.
The flags.
- The list had nine flags. Four were fixed, including two supply contracts past their expiry. Three were evidenced away. Two were disclosed with context.
The vendor due diligence.
- The financial stream found a rebate booked in the wrong year. It was corrected before the data room opened.
Ten weeks on.
- 3 named downside events, each with a number
- 9 flags, each with an answer
- 1 finding corrected before the data room opened
On a retake, all three questions could be answered at "Supported".
What it looked like in our work
From our own work. Redrawn.
For a packaged-food maker preparing a sale, our vendor due diligence ended each finding with what bidders should consider. These were the items it told them to check.
- The forecastWhere reaching the forecast earnings was sensitive, and why.
- An overseas expansionIts timing, the risk in delivering it, and its one-time costs.
- Planned cost savingsSavings not yet started, or not fully identified: their timing, size and full-year effect.
- Pay after the saleChanges a buyer may make to executive pay, incentives and fees.
- Trading termsChanges to terms with key customers and suppliers after the sale.
- One-off itemsIncome that will not recur, and tax credits not yet claimed.
Each card is a question a buyer will ask. A seller can have the answers ready before the data room opens.
5. Effort and dependencies
- Chief financial officerBuilds the downside case and the flag list.
- Vendor due diligence providersRun the financial, legal, tax and operational streams.
- Chief executiveOwns each fix and each disclosure.
What you need
- The bridge from building the plan from the record.
- The customer schedule from spreading the customer risk.
How long
- Six to ten weeks.
What gets in the way. We have seen these in our own work:
- Internal measures that read better. A health services provider slid down its main funder's league table on the measure the funder weights most. Its own internal measures looked fine.
- Years that could not be compared. In one vendor due diligence, a new finance system meant two years of numbers could not be compared.
6. How will you know it worked?
The test is whether a buyer's advisers find anything you had not already answered. Retake the check after vendor due diligence. Each of these should be true when you answer:
| Question | You can answer Supported when | A document alone does not count if |
|---|---|---|
| Whether you know the true downside | The downside is quantified, with the mitigations and evidence that keep the price defensible. | The downside is a percentage cut to the plan. |
| Whether you are ready for the red flags | Each likely flag has a prepared answer, and trading is protected through the sale. | The flags are listed with no answers. |
| Whether the other due diligence risks are dealt with | Each stream's findings are known, with their commercial effect, a fix or disclosure, and an owner. | Vendor due diligence ran, but its findings sit unread. |
The worked example is illustrative.
Think we've used your work without proper credit? Tell us and we'll fix it.