Throwing the Skeletons Out of the Closet

No one is perfect. Businesses are typically run by the imperfect risk-takers. This is one of the main reasons companies require some deal of “spring cleaning” before the companies are ultimately sold. This includes everything from legal issues to financial aberrations which could not only put the business in a bad light, but could ultimately cause a deal to unravel both before and/or after complete due diligence. Of great importance is the need to pull the proverbial skeletons out of the closet prior to selling the business. This principle is best illustrated by a real-life example of a client of ours.

Our client was in the food services industry, supplying a large number of both distributors as well as direct clients in a very niche industry. At the outset of our engagement with this particular client, we were explicit in ensuring there were no skeletons in the closet. We asked several pointed questions, including those related to employees, financials and even legal. The owner was adamant about the pure squeaky-cleanness of his business.

We prepped the company for sale and brought several highly-qualified cash buyers to the auction block. In doing so, this particular customer received an extremely generous offer from the larger of the three final bidders. The all-cash offer was quickly accepted by the seller and due diligence commenced immediately with a 60-day anticipated close date on the transaction. As due diligence commenced, one question arose that caused the deal to fall apart immediately:

Are all of your employees legally documented and able to work in the United States?

Unfortunately for all involved, the seller had failed to divulge the fact that nearly 15% of the company’s workforce were undocumented and illegal–a fact which should have not only been revealed long before the sales process had begun, but should have been remedied before we had even begun speaking with buyers.

Are there skeletons in the closet of your business? If so, they’ll need removing before you even think about selling. Otherwise, your company could be another wasted M&A statistic of deals that never crossed the finish line.



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Nate Nead
Nate Nead is a licensed investment banker and Principal at Deal Capital Partners, LLC which includes InvestmentBank.com and Crowdfund.co. Nate works works with middle-market corporate clients looking to acquire, sell, divest or raise growth capital from qualified buyers and institutional investors. He is the chief evangelist of the company's growing digital investment banking platform. Reliance Worldwide Investments, LLC a member of FINRA and SIPC and registered with the SEC and MSRB. Nate resides in Seattle, Washington.
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