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Introduction
The issue of business succession is currently a major concern for large segments of Germany’s small and medium-sized enterprises (SMEs); more than approximately 200,000 SME owners are seeking a solution within the next three to five years to ensure their companies’ continued success into the future.
If business succession is not arranged within the family, the options include bringing an investor on board as a minority or new majority shareholder, or selling the company outright.
This presents business owners with the challenge of finding the right prospective buyer—either on their own or with the help of a suitable advisor specializing in mergers and acquisitions (M&A). This is where DUB Premium’s new offering comes in, providing a 24/7, closed, and therefore confidential platform that enables business sellers and prospective buyers to connect with one another.
On the other hand, various specialized disciplines come into play during a business transaction, such as financial analysis, taxes, law, business valuation, and M&A advisory. For these, it is also important to consider which aspects can be handled using in-house resources—that is, with your own employees and expertise—and for which areas it makes sense to engage specialized advisors.
In the following, we will take a closer look at the topic of financial analysis, or financial due diligence (meaning “due diligence” in the context of M&A processes), from among these individual disciplines.
Financial Due Diligence
In a corporate transaction, there is typically an information asymmetry between the seller and the buyer due to the fact that the seller knows their company and thus has an information advantage over the potential buyer. As part of buyer-side due diligence, the potential buyer attempts to reduce this information asymmetry as much as possible. Here, “due diligence” refers to an analysis of the target company “with particular care.” The goal of due diligence is to identify the company’s strengths and weaknesses, opportunities, and risks, as well as to identify, quantify, and assess the value drivers. It also aims to identify potential issues that could lead to the termination of the transaction—so-called “deal breakers.”
Due diligence covers the past—typically the last three fiscal years—through the present, including current business performance (“Current Year Trading”), and extends to the forecast or business plan, which is analyzed as part of the corporate planning review and typically spans three to five years. Particular emphasis is placed on analyzing sustainable earnings, typically EBITDA (earnings before interest, taxes, depreciation, and amortization), net financial debt (i.e., cash and cash equivalents, bank balances minus long-term interest-bearing liabilities), and an appropriate level of net working capital. The results of this analysis are directly incorporated into the business valuation and the potential buyer’s purchase price calculations.
On the seller’s side as well, we regularly recommend conducting due diligence—in this case, preparatory due diligence. This allows the seller to gain a comprehensive picture of their company well in advance of the transaction, from the perspective of a potential buyer. In particular, this means that objective considerations take precedence over subjective ones—especially since the transaction often involves the founder’s life’s work. The seller can thus optimally prepare for the transaction process and use this to their advantage. This includes, in particular, preparing for the Questions & Answers (Q&A) process initiated by the investors—during which potential buyers direct questions to the target company—drafting the initial version of the Share Purchase Agreement (SPA), and, last but not least, “SPA”), and, last but not least, establishing their own expectations regarding the purchase price to be achieved, including ancillary terms.
DUB.de Premium
DUB.de Premium is the name of the new digital transaction platform, which, as a specialized offshoot of the well-known and established DUB.de Deutsche Unternehmensbörse, is aimed at established medium-sized companies with a revenue threshold of approximately 20 million euros or more.
It addresses the changing needs of sellers and buyers and combines extensive national and international reach with 24/7 mobile accessibility (“M&A to-go”) with efficiency and the essential confidentiality required in a structured matching process.
DUB.de Premium supports business sellers and prospective buyers from the initial listing through to the merger of the two parties, establishing valuable contacts with experienced M&A advisors at various stages of the transaction process.
Deloitte’s Digital Commitment
Deloitte, as the world’s largest consulting firm, supports DUB.de Premium as a strategic partner with know-how and transaction expertise drawn from a wide range of national and international corporate transactions in the SME sector.
As one of the Big Four accounting firms in Germany, Deloitte, with its team of specialists, advises many mid-market companies on all aspects of corporate transactions and also possesses outstanding expertise in dealing with financial investors and family offices. The scope of its consulting services ranges from traditional financial and tax due diligence, through carve-out support and business valuation, to post-merger integration.
In addition, Deloitte, together with colleagues from its law firm, provides legal advice, including the drafting of confidentiality agreements, letters of intent (known as “LOI” or “MOU”) to the drafting of purchase agreements (known as “SPA”).
Deloitte is a global leader in consulting, analysis, and the digital transformation of business processes; as such, it is both an incentive and an obligation to address the succession and M&A processes with the best digital solutions.
Conclusion
In a fragmented market such as that of SME transactions, digital solutions like DUB.de Premium help to quickly and efficiently bridge existing information asymmetries.
Through Deloitte’s strategic partnership with DUB.de Premium, the traditional consulting approach—including expert knowledge—is optimally combined with the advantages of a digital transaction platform for the benefit of clients and users.
