Due diligence when selling a business

Undertaking Due Diligence before selling your business

When preparing to sell your business it’s important to undertake due diligence as poor preparation could be costly.

Due diligence is the step taken in the selling process where the vendor will need to be open to having their business come under close scrutiny. It doesn’t matter how well or how advanced negotiations are if there are any hidden factors then they are very likely to come to the surface which could scare your buyer off.

Disclosing full information

Before the due diligence phase begins, a seller should be asking the potential buyer for a full list of documents and all aspects of the business that they would like to have access to.

Generally speaking, its suggested that creating a sellers pack which addresses any issues that might arise is a good exercise to undertake. This is upfront due diligence and furthermore, its suggested that hiring legal professionals from the outset is key.

If there’s anything that a seller feels they shouldn’t have to disclose, they will need a valid reason.

Remember, undertaking due diligence is regarded as a final hurdle for the buyer, if a buyer is asking for something that could put a negative spin on the business, it would be better for the seller to have time to prepare a positive spin on the issue in question.

The three aspects of due diligence

There are three aspects of due diligence: legal, financial and commercial. A seller should concentrate on all three aspects to ensure that the business they are selling stands up to the buyer’s scrutiny.

Buyer’s will normally look at the financials first this will include statutory accounts, forecasts, budgets, and monthly management accounts.

From a seller’s perspective, it’s important to minimise perceived risk so they must ensure they fully understand the figures as well as be able to explain confidently how forecasts will be met.

Sellers will typically be asked for employee, client and supplier contracts, shareholder agreements, asset registers and a lot more. If you’re organised and have all this ready in advance this will significantly reduce the time and costs associated with due diligence.

One of the most important factors for a buyer is what are they getting for their money and where are the risks of the value of the business disappearing.

Place yourself in the shoes of the buyer

When selling a business, place yourself in the shoes of the buyer and consider whether or not you want to review that aspect of the business. If the answer is yes, then you will have to allow the buyer to review. For example, the buyer will want to know that any current relationships with suppliers at current prices will continue after the sale, if his cannot be guaranteed the deal could hurt seller.

Ensure that you protect yourself

Before a buyer starts any form of due diligence on a business, a seller should consider having a Non-Disclosure Agreement (NDA) drawn up with the prospective buyer. This is an important agreement which protects the sellers against the leaking of any confidential information other than to its professional advisors.

Make sure you are prepared

Quite often poor preparation can be one of the main reasons for deal fatigue, if you haven’t collated key business information and documentation, for example items such as contracts or company accounts, if these are not readily available or either party doesn;t respond to queries in a timely manner the time it takes to perform the due diligence will take longer (potentially it could cost more) which could lead to deal fatigue becoming more likely.

Try to avoid surprises

Sellers should avoid surprising any potential buyer(s) with any undisclosed issues: for example, a legal claim that has laid dormant for a period of time, a complaint that was ignored has now escalated to legal action. This could destroy the trust.

Due diligence is an unavoidable process in the sale of any business, and it pays to pre-empt any potential issues. There could always be surprises that come from the buyer as well, like changing their mind to a different acquisition and deciding to not pursue the purchase of your business.

Honesty through the selling process is important, if you need to don’t be afraid to hire professionals