Due diligence is a critical element of most business sales. Buyers will always want confidence that they understand the risks and rewards of the business they are buying. If there are surprises, it will give them a chance to chip away at the sale value or potentially walk away from the deal altogether.
Preparation should begin long before the business goes to market. It often takes two years to get the business in a position that will inspire buyer confidence and facilitate a smooth sale.
Here we set out the key steps that should be considered when preparing a business for sale.
1. Think like an outsider
Buyers will eventually take a forensic look at your business so it is crucial you identify areas of concern before they do. Think critically about your business and how it could be perceived by an outsider.
Ultimately all businesses have risk areas. Understanding how these might be perceived early on allows you to mitigate their impact, either by taking steps to address them or by disclosing them in a constructive and balanced way at the start of the process. Both actions will build a trust factor that should positively impact the eventual deal value.
2. Get the business in the best possible shape
Your current and historical financials will be under the magnifying glass during the due diligence process. In the years ahead of sale, take a detailed look at your profit and loss, cash flow and budgets. Improving your position - or the presentation of your position - before going to market can significantly enhance the eventual deal value.
A strong pipeline of prospects gives buyers confidence that the business has momentum. Be clear on your sales potential and be ready to provide evidence by creating a history of sales prospects and conversions. If customer deals are reached on handshakes, find ways to draw up formal contracts or secure letters of intent.
It is helpful if any legal disputes, employee issues and IP considerations are resolved ahead of a sale. Think about whether you need to update the legal structure, documents or contracts: often it is more cost effective to sell a streamlined group than one with many subsidiaries and legal complexities.
3. Record the right information in the right way
It is not enough to tell buyers about business performance – they will eventually want to see the evidence. Buyers often request at least two years of management accounts during the due diligence process. If you do not have this information, it is a good idea to prepare it in advance.
Be prepared to take a deep dive into the data, such as analysing revenues and margins by customer or product, so you are ready to explain buyer questions and respond to their observations. An online data room is generally a useful tool to present due diligence information in a clear and controlled way. The easier it is for buyers to digest your business information, the more confidence you will inspire, and the better the final deal is likely to be.
Click here to download our financial due diligence simplified guide.