30 Jun The Psychology of Due Diligence
In our second article on the due diligence process with Doug Robbins, we further explore Robbins’s considerable knowledge on the subject. This article is based on our recent webinar entitled “The Due Diligence Process with Doug Robbins.”
As discussed in our last article, the due diligence process is not a one-dimensional one. There are many variables and factors involved in successfully completing due diligence. Many of these relate to how the various people involved are thinking and feeling.
The Importance of Psychology
One factor that is often overlooked is the human equation and psychology. Robbins notes that it is often necessary to get a client’s entire family involved before a business goes to market. The simple fact is that family members can interfere in a variety of unexpected ways. For this and other reasons, it’s quite important for business brokers and M&A advisors to understand the role that family members may potentially play. Family members may interfere with the sale or be disruptive in some manner. It is important that you mitigate this potential interference as much as possible.
Interviewing Buyers
It is also important for you to understand the limitations and psychology of your clients. This is why Robbins notes that Robbinex® starts the process by interviewing the purchaser. Or as he stated, “We begin by performing due diligence on the buyer and we ask lots of questions.”
He recommends developing what he calls a “consultative dialog” with a buyer in order to understand why they want to buy a business as well as what their expectations are for doing so. The same approach takes place with sellers as well. You will, of course, want to understand why a seller wants to sell.
Managing Expectations
Expectations play a massive role in the due diligence process. He feels that it is essential, for example, that buyers understand that buying a business isn’t as simple as selecting a business and writing a check. They need to have complete clarity on the fact that the process of buying a business can be lengthy and complex.
Additionally, it’s essential to help educate buyers so they understand that buying a business and operating it successfully are two very different arenas. Some key questions that buyers must answer are:
- Where do you see your growth coming from?
- Where will you find new employees?
- Where will you find additional working capital?
- Do you have a strategic business plan in place?
- What do you expect to accomplish by making this acquisition?
Seller expectations are likewise a critical part of due diligence. You should seek to understand what the seller is hoping to accomplish as well as what price they expect. Are they flexible on these expectations? For example, will your seller be willing to stay on as a consult to the business for a period of months, and be on-call for a considerable period of time after the business is sold? If so, that can make a big difference to the buyer.
Factoring in Other Professionals
Due diligence extends beyond the business itself and the buyer and seller. Other individuals involved in the process, such as bankers and lawyers, must be factored into the due diligence equation.
Robbins explains, “Bankers are salesmen. Do be careful of bankers, they’ll tell you whatever they think you want to hear, but then can’t deliver when needed. Some banks take months to get a term sheet out.” He also points to the fact that most lawyers have no experience in business transaction. This can cause chaos and potentially disrupt deals.
When you give time and consideration to the psychology of the various parties involved in the deal, it can dramatically improve outcomes. The more you can understand and manage psychology, the better.
