Going through the private equity due diligence process can be stressful and time-consuming if you're not prepared structurally and emotionally.

There's a way to get through it faster and easier, but it requires you to follow a few core principles:

Uncomfortable honesty

Describe the critical or major issues in the company in a simple written list, uploaded to the data room, and discuss them openly during the diligence process.

It's counterintuitive for most sales processes to incentivize you to minimize or brush over the issues, but sophisticated private equity investors will not only find the issues, but will respect you and trust you more due to forthright disclosure. Every business has blemishes; there's no such thing as a 100% score.

Besides, you will likely be working closely together for the next 5-7 years, so starting the relationship with respectful but frank communication serves everyone in the long run.

In general, we have rarely seen active hiding of information from investors, except in maybe one case. So, it's more a matter of mindset and perspective shifts than fraud.

We've seen this level of honesty improve the firm's valuation because there is less management risk to underwrite.

Short, direct answers

During management discovery sessions, we will ask a number of questions to understand the gaps in the files added to the data room, check that our understanding of the business and the market matches reality, and ensure we are uncovering truths or issues that are either hidden or disregarded due to the "blindness" caused by running the business.

Blindness represents quirks of a business where "it's always worked this way" rather than best practice or simply the lack of time or resources to address it.

However, we do see a wide range of responses to our questions. Some are long, some are storytelling histories, some never answer the question, but few are short and direct.

For example, if we ask, "When did you start the business?", the best way to approach this is: "2012", and not "Well, a long time ago, in a land far, far away, there was this...".

As you can see, the first short and sweet response invites a follow-up if needed (often they are not). The second wastes the group's time and energy. These are expensive calls, often with multiple diligence firms, multiple members of management, bankers, and potential buyers. Some calls can have up to 25 or 30 people in them.

The ability for management to volley back and forth like rapid-fire chess is the best outcome.

Strategy-to-detail data room documentation

Finally, after reviews of hundreds of data rooms, we understand what good looks like. The best possible outcome from a product growth strategy and capital allocation perspective looks like this:

  • Single PDF document
  • Shows the analysis of how the defensible product strategy was developed
  • Shows the decided strategy and existing penetration into the SOM/SAM/TAM
  • Shows how the product fits into that future strategy
  • Shows how the roadmap has prioritized new product development investments aligned with that strategy
  • Shows the financial model for how it impacts the north star metric and underlying driver metrics, attributed to each element in the roadmap
  • Shows the real-world progress against the strategy (i.e., we are here)
  • Shows the execution velocity of the team for achieving the roadmap
  • Shows the expertise of key members of the team and who is required to achieve it
  • Shows how it has driven improvement in the Rule of 40 metric (recurring revenue growth percent plus EBITDA margin percent)

There are obviously other things like legal reviews, quality of earnings, HR, security, business continuity, etc, but this is the core of how the engine of the business works.