If you’re a business owner looking to sell now or in the future, you may be discouraged to hear that many sales fall apart during the due diligence phase. You have the ability to minimize the risk of this happening by being a diligent business owner before putting your business on the market.
Due diligence may be the most critical stage in a sale transaction. During this process, the prospective buyer will do their best to learn the intimate details of your business. The objective will be to uncover as much as possible before buying the business to ensure the price is justified and to avoid unwelcome surprises after the closing.
PRE-SALE DUE DILIGENCE
Most businesses are not perfect, so it’s a good idea for business owners who want to sell to perform “pre-sale due diligence” before going on the market. This will provide a feel for issues a prospective buyer may raise. It’s like conducting an inspection before listing your home—it gives you an idea of the repairs a buyer may want you to make or take a reduction in price for. It can also reveal items that may be so significant—such as a faulty foundation—that the buyer may just walk away altogether.
This exercise in business self-awareness requires that the business owner dig into legal, financial, accounting, tax, operational, administrative and other matters that a prospective buyer might consider relevant to a purchasing decision. This may seem like a daunting task, especially for a business owner who is also trying to run the day-to-day business operations. Professional advisors like lawyers, accountants, business brokers and experts in business administration can help at a reasonable cost.
WHAT TO REVIEW—AND WHEN
To be in the best position for a successful sale, begin pre-sale due diligence one to three years before putting the business on the market. Gather documents based on a comprehensive due diligence checklist provided by a trusted resource, address issues or gaps to the extent feasible, and regularly keep the business in order and your records up-to-date from there on out.
To save on cost, an initial review of the documents can be performed by an independent and experienced non-legal professional who can lead the pre-sale due diligence team, help identify areas where legal expertise is needed and manage the internal virtual data room where the documents could be archived and regularly updated.
A careful review of business affairs ahead of a sale transaction will enable the pre-sale due diligence team to identify and resolve issues before the prospective buyer uncovers them. There may be some issues that can’t be remedied. For these, at least you will have had a chance to consider a response and potential resolutions before the prospective buyer asks about them, as opposed to appearing tentative, disorganized or as if you have something to hide.
Issues that arise during a prospective buyer’s due diligence can cause delays in closing, reduce the price a buyer is willing to pay or kill the deal.
Tackling your business housekeeping ahead of time should put you in a more favorable negotiating position and increase the likelihood of a successful sale at the highest possible price.
It will also give you peace of mind as you continue operating your business until you’re ready to sell to a third party or hand over the baton to a family member or valued employee.