Due diligence and careful examination of the business is what you can expect from potential buyers and something you want to do yourself for your business too. It will uncover some hidden aspects of your business. If some of these aspects reflect poor performance and preparation, this can cost you a lot. In order to get the best possible deal and the highest selling price for your business, you want to be able to make sure that the due diligence of your business will show great performance that will maintain prospective buyers’ confidence and safety when they are investing in buying your business.
Due diligence is the moment of the entire business trading process, when you, as an owner of the business, must be honest and clear, open up your business for a detailed and thorough examination by the buyer. While you are negotiating the best selling price with potential buyers, some hidden skeletons of your business may pop out of the closet and pretty much delay or completely cancel the whole deal. You don’t want that happen, that is for sure. Especially considering the fact that statistics show the impressive half of all small businesses that are listed on the market to fail a deal exactly due to some surprises the due diligence uncovers. This is largely due to the inability to maintain buyer confidence and often due to the disclosure of some problems and issues with the business that have not been cleared up to this stage of the negotiation process. Therefore, it is one of your priorities, when selling your business, to prepare for the due diligence process and make sure you are not hiding any bad surprises to the buyer.
Honesty and Complete Disclosure
There is no point in hiding business problems, as these will be uncovered soon or later. Make this stage of the negotiations completely transparent and make communication honest, otherwise, buyers will learn your secrets the worse way and after close scrutiny. By ensuring complete disclosure you are usually ensuring a better deal that will happen sooner than if you try and hide some facts and aspects. Before you enter the due diligence stage of the process as a seller, make sure to ask the buyer for the full list of all documents and aspects of the business they want to check out. You can even go the extra mile and additionally provide analysis or review of all issues that might arise in the future. If you cannot do that yourself, you can always ask for the assistance of a professional legal advisor for checking out all potential future risks and threats for your business and addressing them in time. Make sure to fully disclose all sensitive issues to your legal advisor and they will be able to help and advise you the best way how to deal next. If there is something you don’t feel ok disclosing, then you have to have a valid reason for doing so and even this can scare off potential buyers easily.
Types of Due Diligence
When it comes to due diligence, in general, there are three main ways your business will be examined – legally, financially, and commercially. Your main priority is focusing on all these three aspects of due diligence so you have the peace of mind that even after a comprehensive examination from the buyer, your business will withstand and the buyer’s enthusiasm won’t cool off quickly.
The first thing a potential buyer will be interested in when researching your business is the financial due diligence and this will include not just statutory accounts but also budgets and forecasts, monthly management accounts too. Your job as a seller is to make sure you minimize all potential risks and you are fully conversant with the figures, have enough information and understanding to explain with confidence how the forecasts will be met. Make sure to also prepare for the rest the potential buyer will ask you for, including employee, client, and supplier contacts, shareholder agreements, asset registers, etc. By knowing all the information and providing you to the interested buyer on time, you will significantly cut down the precious time you don’t want to waste and also additional costs associated with due diligence.
Also, keep in mind that different businesses will require different types of due diligence, so know what is the right one for your business. It all depends on where mainly the value of your business is and this aspect will be examined the closest. Here, the focus is on the main thing the buyer is paying their money for. Also, think of where is hiding the danger of de-valuing your business. The health of your company will be examined very carefully and comprehensively, all potential liabilities in the future will be addressed by the buyer for sure, therefore you should be ready to provide all answers with confidence during this stage of the negotiation process.
Consider What the Buyer Want
Putting yourself in the buyer’s shows is very important to give you an idea of how much information about your business you are willing to share. Often you will get requests from buyers you are not immediately willing to serve. Maybe a buyer will want to speak to your employees, to your customers, and to your suppliers. However, wouldn’t you want to do the same, if you were the buyer? As a buyer planning to invest money by buying a business, you would also want to be familiar with all processes and aspects of the business. If you put yourself in the buyer’s shoes and you know that you also would like to collect all that information if you were the buyer, then you should say “yes” to their requests.
Protect Yourself
However, it doesn’t mean that you have to forget about your own protection in order to serve all of the buyer’s demands and allow all the information shared. Make sure to protect yourself at all costs from leaking of confidential and sensitive information about your business. You want your buyer to sign a non-disclosure agreement before even the due diligence begins. This is important to guarantee that the potential buyer won’t disclose any sensitive or confidential information to anyone else that their professional advisors. You can also protect confidential and sensitive information about your business by only allowing the buyer access to your management team or certain senior members of the staff. In this case, make sure that all employees in your management team have contracts with a clause that ensures the confidentiality of information about your company.
There are many ways to provide the buyer will all important and necessary information without affecting the safety of your company by revealing confidential information.
Early Preparation
Forget about preparing yourself for the deal last minute. It is a key moment to allow yourself enough time to prepare and this will contribute to a faster, more efficient and successful deal and due diligence. Poor preparation is often the cause for the buyer’s enthusiasm and interest cooling off quickly. Therefore, you want to be ready with all information and documentation you will be asked about, all contracts and accounts, respond to all queries in a reasonable time, and make sure the period of due diligence takes as little as possible.
Avoid Hidden Surprises
One again, it is important to make sure that no hidden skeletons and unrevealed surprises will pop out of the closet and scare off the potential buyer. Examples for such bad surprises could be a customer claim that has not be dealt with and now the things have escalated, or a legal claim that has been neglected for a while. These may not be enough to scare off the potential buyer and break the deal, for sure, but such things will make the buyer question other information you provide and make the whole due diligence process harder and more time-consuming.
Deal with any potential problems and issues before the process of due diligence and also take your time to consider the possible surprises that may come from the buyer too. You want to be ready for all situations and handle them with confidence while minimizing the bad impact they may have on your business and the selling process.