In this episode of Private Market Insights (our 20th episode!), we welcome Roman Beylin, the founder of DueDilio, a marketplace for assembling teams of experts who support the M&A due diligence process. The conversation is full of useful insights based on Roman’s extensive experience in the field of due diligence and his holistic viewpoint on the process.
This conversation with Roman also marks the start of a significant partnership between our two organizations. Users can now request vetted DueDilio service providers from within the Private Market Labs platform, reaffirming our commitment to streamlining the small business acquisitions process.
Read on for the podcast episode summary and more details on the partnership. You can watch the full episode here:
Traits of the Most Successful Buyers
Roman has observed thousands of transactions through DueDilio, which gives him a unique viewpoint on what makes buyers successful. He mentioned that the number one characteristic among successful buyers is the consistency and quality of their communication, a theme that consistently came up throughout the conversation. Effective communication is vital, not just with service providers but also with sellers, brokers, lenders, and other external parties involved in the transaction.
The most effective buyers typically initiate contact to start building their diligence teams early in the process, often even before they have a Letter of Intent (LOI), and frequently ask questions about procedures, timelines, and budgeting. Roman notes that these successful buyers are often well-prepared, having researched through various due diligence checklists and online content, and are familiar with concepts like virtual data rooms.
Roman also highlights the importance of grit, observing that often the first deal a buyer works on may not close. He identifies that resilience, combined with thorough preparation and effective communication, is a common trait among successful business buyers.
The Most Important Aspects That Can Make or Break a Business
Roman advises buyers to focus time and budget on the most crucial, “deal-breaker”, aspects of a business during the due diligence process. Buyers should start by conducting an initial assessment of the business, focusing on identifying how the business generates revenue and what factors could potentially disrupt this revenue stream. For instance, in a tech company, a malfunction in a vital part of the software could be far more detrimental than issues with less critical components like email systems. This prioritization guides the buyer in focusing their due diligence efforts effectively.
Returning to the theme of communication, Roman also suggests that buyers clearly establish with the seller and other involved parties what their approach to due diligence will be – outlining what will be required from the seller, understanding where essential information is stored and how to access it. Being informed as early as possible not only facilitates the buyer’s process but also assists the seller in being adequately prepared.
An additional point made by Roman is the importance of assembling a competent deal team once the Letter of Intent (LOI) is in place. This team should be capable of addressing the specific needs of the due diligence process, which may vary significantly depending on the nature of the business being acquired. He encourages the use of online resources such as preliminary due diligence questions and checklists as useful tools in this process.
Start with Financial Due Diligence and Legal Counsel
Roman emphasizes that for most transactions, financial and legal expertise are fundamental requirements in the acquisition process, or as he puts it, “table stakes”. Financial due diligence is critical for understanding a business’s fiscal health, while legal counsel is essential for navigating the complexities of the acquisition agreement. The necessity of these services can vary depending on the buyer’s background. For instance, a buyer with a financial background might be able to handle financial due diligence on their own but may need assistance with operational due diligence, illustrating how different backgrounds influence the specific types of due diligence required.
He strongly recommends engaging an attorney early in the process, especially if an Asset Purchase Agreement (APA) will be used. While opinions may vary on the necessity of legal representation for the Letter of Intent (LOI), Roman leans towards recommending legal advice for this stage as well, to ensure all bases are covered.
Roman considers that the transaction size can be a factor in deciding whether to engage an attorney for the LOI. For larger transactions, he suggests having an attorney draft the initial LOI, after which the buyer might make modifications independently. He encourages buyers, especially those who are not comfortable with legal documents or are engaging in significant transactions, to seek legal advice. He mentions that many attorneys might help with the LOI at a discounted rate or even for free, with the expectation of being hired for the full transaction.
How to Manage Service Providers Effectively
There is no one-size-fits-all approach, but certain strategies can help buyers effectively manage their service providers. Roman encourages buyers to assess their own management style and to select service providers that align with it.
While boutique private equity firms might prefer service providers to remain in the background, with minimal contact with the seller, first-time business buyers may want to fully leverage their expertise. The key, according to Roman, is for buyers to set clear expectations and roles for each service provider, ensuring regular updates and open communication lines.
True effectiveness of a service provider may only become apparent after the deal is closed, as the impact of their work unfolds over time. Regular updates and clear communication during the due diligence process are crucial, but buyers should also conduct their due diligence on service providers, ensuring they have relevant experience and positive reviews. Buyers should also stay on top of information provided by the seller. Understanding all possible angles of the business can help the buyer make a more informed decision.
Trust in the service provider is crucial, but Roman advises buyers to remain responsible for major decisions. This balance is important to avoid situations where a service provider, such as a lawyer, might overstep their role and dominate the deal process. When selecting service providers, Roman suggests vetting their approach beforehand, especially regarding attorneys. It’s important to understand whether they are transactional (focused on getting the deal done) or more confrontational (focused on identifying every possible issue). Open and honest communication about expectations before hiring is essential.
Managing Due Diligence on a Budget
According to Roman, quality doesn’t necessarily have to be sacrificed for cost. His advice for buyers, especially those working within tight budget constraints, includes several key points. The first is putting prioritization over cost-cutting. Buyers should not think in terms of quality versus cost, but rather prioritize the crucial aspects of due diligence. They should focus financial resources on the most important areas of the due diligence process, rather than trying to cover every possible aspect.
Another piece of advice is to choose service providers that offer a balance between quality and cost. Roman points out that for smaller transactions, it may not make sense to hire high-end firms like KPMG, as their services might be overkill for the deal size. Instead, buyers should look for independent professionals, boutique firms, or mid-size firms that offer high-quality services. Platforms like DueDilio and Private Market Labs can assist buyers in finding the right service providers within their budget.
Roman also emphasizes the importance of negotiating fees, a potential area for savings. In some cases, investors or lenders may require due diligence to be conducted by a name-brand firm, which significantly reduces cost-effective options. However, if there are no such requirements, hiring independent providers can be a perfectly viable choice and buyers should be comfortable negotiating fees and cost structures with them. While it’s important to have realistic expectations, there is often room for negotiation.
A Mature ETA Market with Plenty of Niches
In the concluding part of the conversation, Roman offers his perspective on future trends in business acquisitions. Reflecting on the business acquisition industry, he notes its evolution from early, less structured stages to a more mature phase, anticipating that this trend will continue. A key factor influencing this evolution is the ongoing retirement of baby boomers, which is expected to significantly increase the number of businesses available for sale.
Despite the current trend among buyers favoring home services, he anticipates a shift towards more niche markets. This shift will likely lead buyers to focus on industries where they have specific expertise, fostering more targeted acquisitions.
However, not all buyers will purchase a business in an industry with which they have experience. Roman shares a memorable case study: an American client acquiring an Eastern European grocery store in New York without having the cultural background of his niche. This brought some unique challenges, such as sourcing products from Europe and handling a meat manufacturing plant overseas, capturing the current complexity and diversity in the world of business acquisitions.
Private Market Labs and DueDilio: A New Partnership for the Benefit of the Community
The newly inaugurated collaboration between Private Market Labs and DueDilio marks a pivotal step in streamlining the acquisition journey. Private Market Labs is an innovative platform, which democratizes the small business acquisition process by matching buyers with deals. Through this partnership, users of Private Market Labs can now directly request high-quality, vetted due diligence support from DueDilio, ensuring a seamless transition from the deal sourcing phase to the crucial due diligence stage within the platform.
This feature greatly benefits users by simplifying the process of assembling a deal team. When a deal is saved on Private Market Labs, users will see the option to “Request service providers”. This button automatically connects users with DueDilio and efficiently shares the necessary information to initiate the due diligence process. This integration embodies the shared goal of both platforms to facilitate successful deal closures, providing essential support at every transaction stage with vetted deals and professionals.