Thursday, April 19, 2007/
I’ve found the cost of using a Big Four firm is worth it when it comes time to sell. It adds credibility to the accounts, which smoothes the due diligence process.
Why I use a Big Four firm
I have often been asked why I used a Big Four auditing firm with my last venture given that it started with a dozen staff and had only 30 when I sold. My response has always been to point out the credibility a Big Four firm adds for a prospective buyer’s due diligence and in deal discussions, and I usually ask the questioner whether I got value for money.
My last business went into free-fall after several large software corporations decided to enter my market with similar products. All my prospects were their customers as our supply chain optimisation software sat alongside a large enterprise resource planning (ERP) system such as those sold by SAP, Oracle or Peoplesoft.
When these corporations announced they were going to develop their own supply chain optimisation solutions, their customers decided to wait for the integrated software solution from their main vendor. I found myself with 30 staff and no prospects. Naturally we decided to sell the business before we were forced to close the doors.
This was my fourth software business and I had the experience of working through the sales process for the earlier ones. I also had been through the due diligence process for raising venture capital twice and taking on a large corporate loan.
I knew from those experiences that being prepared for due diligence was a critical part of getting a quick decision. I also knew that the quickest way to get through the due diligence process was to ensure that the professional advisers I used had high credibility. Basically, I wanted to have all my source documents accepted without question. The only effective way to achieve this is to have the biggest and the best.
When you are selling out to a large, perhaps, global corporation they are going to undertake a very extensive and sophisticated due diligence. They will almost certainly use a large auditing firm and a highly respected legal firm.
To uncover the risks and problems in your business, these advisers review everything. The only way you can speed up this process is to demonstrate they don’t need to audit most of the historical information because they will be able to rely on the documents produced by your own advisers.
My approach here was to push back hard and state that any additional audit was wasting my time and the buyer’s money but that I was willing to provide warranties for the quality of the information presented. In any case, if there was a subsequent problem, they could always go back and litigate against my advisers, who would normally have much deeper pockets than me.
This last business of mine was sold for six times revenue to Peoplesoft in a period of just over two weeks. Given that it was losing more than $1 million at the time, whatever additional fees I paid to my advisers was well and truly worth it. When you are dealing with large corporate buyers it is best to have good quality advisers in order to be very well prepared for the due diligence and the negotiations.