Business Sale Due Diligence Basics
Selling your business can be a long and tedious process, especially when you work hard to maximize total sale value. In this regard, your interests and the buyer’s are not aligned. They want the best possible deal, and so do you. But the best deal for each of you looks quite different. Due diligence can help with determining the actual value of the company and uncovering any unidentified issues. Here’s what you need to know about the process:
What is Due Diligence?
Due diligence is a comprehensive investigation of the business to confirm all the facts, especially about financial data. Buyers usually look at receivables and payables, physical capital, intellectual property, legal liability, EBITDA, capital expenditures, and more. The process usually requires a review of financial statements and projections, a market analysis, and an overview of the business’s operations. It may also involve a complete examination of any legal issues.
The Importance of Due Diligence
Due diligence can be frustrating at times for all parties, but due diligence actually increases the chances that a transaction will succeed. This is because:
- Due diligence reduces the role of bias in decision-making.
- Due diligence reduces the power of incentives to push the deal through at all costs.
- Financial information is often incomplete until due diligence.
- The process may uncover significant areas of exposure or liability.
Preparing for Due Diligence
Sellers should perform their own due diligence process before embarking on due diligence with a buyer. This sell-side due diligence allows you to uncover potential issues so you can address them ahead of the sale. You’ll also have all the documents the buyer needs ready to go, potentially expediting the sale. The specific documents you will need vary from company to company, but generally include bylaws, articles of incorporation, details about lines of credit and loans, supplier agreements, employment contracts, IP agreements, and financial documents. Working with a skilled investment banking team will ensure that the due diligence process is executed correctly, and that your company is in the best position to either continue with the sales process or if it makes more sense to focus on issues discovered during the process.
What to Expect During Due Diligence
Due diligence begins when both parties sign a letter of intent and agree to a due diligence schedule. The buyer will likely hire legal and financial experts to help them evaluate your company during the process. You’ll need to promptly give them the information they request. In general, some questions you should be prepared to answer include:
- Details about your finances, including the methods you used for financial forecasting.
- An overview of your team, and especially of your management and executive team. Prepare a profile of each team member, as well as details about their duties.
- Legal issues. The buyer will want to know about areas of legal exposure, as well as ongoing litigation.
- Marketing plan. The buyer is purchasing your business to make money. They want to know how you market your business, so that they can plan their own marketing efforts.
The due diligence process can be frustrating and exhausting, but it’s a key step on the road to successfully completing a transaction. With adequate preparation, due diligence can be smooth sailing. So spend some time now getting your records in order and conducting your own due diligence. Surprises during due diligence are almost never pleasant, so minimizing the odds of surprises now is one of the best investments you can make in a successful sale.