Due Diligence: What to Expect When Selling Your Business
As you prepare for one of the biggest transactions of your life, business owners are left asking: Did I forget anything? When selling a business, overlooking one simple form or report can lead to long-lasting headaches, disputes and even legal action. The good news is that there is a secret to a smooth sale process: Due Diligence.
You’ve likely heard the term due diligence before, but what does that mean in practical terms when selling a business? Due diligence is often seen as a single step of the sale process, but it’s the sum of many parts, each of which creates a clearer vision of your business.
The goal of due diligence is to provide potential buyers with the opportunity to review the accuracy of a business portfolio, but it’s also incredibly valuable to sellers. Digging deep into financial reports, contracts, and reports on assets and liabilities enables sellers to make necessary changes to strengthen their operations before settling on a purchase price.
What is Due Diligence? How Sellers Can Benefit
Business owners are often well-versed in the daily operations of their brand. Products and services might make customers happy, but the filing cabinet is what keeps the lights on. Thorough due diligence involves collecting necessary documents, licenses, vendor agreements, financial reports, tax returns, shareholder agreements and other relevant reporting for review.
For long-standing businesses, it’s common to see critical data being overlooked until kick-starting the due diligence process. When working with a business broker, every report is an opportunity. Part of the process involves careful review of what keeps your business running and will identify areas of concern that might pose risks that would otherwise go unnoticed.
The due diligence period will present areas of opportunity for sellers to seize. For example, outdated software or technology might be a hindrance to the overall business profile. In this case, investing in upgrades may result in the ability to demand a higher purchase price from buyers.
Due diligence when selling a business should be seen as an in-depth view of where you can increase, reduce and update your practices for a more robust and appealing seller profile. Following along with a due diligence checklist makes it possible to avoid disagreements down the road and encourages a smooth sale.
How to Perform Due Diligence: The Seller Perspective
When presenting a business for sale, it often begins with a limited portfolio that acts as a quick snapshot of the brand and its overall mission statement. These initial listings will often showcase the positive attributes of a brand without revealing sensitive information. Once a potential buyer expresses interest in purchasing the business or signs a letter of intent, it is time to present a more fully developed look at the nitty-gritty. This period between the signed letter of intent and finalization is referred to as due diligence.
The due diligence process involves collecting and reviewing documentation that is relevant to your brand, including financial statements, valuations, vendor agreements, third-party contracts, asset and liability reports and any other documents relevant to running the business.
Collecting documentation might seem simple, but navigating an established business structure can be complicated and stressful.
To demystify the due diligence process, it should be broken down into categories:
- Financial Records
- Vendors & Third-Party Agreements
- Relevant Documentation
Financial Reports
The goal of financial reporting is to measure the financial performance of a business. This may seem simple enough, but in addition to customer sale records, prospective buyers will want an expanded view that stretches over multiple years. In addition to standard profit and loss statements, sellers may have to present third-party reports.
Some of these third-party reports might include:
- Bank Statements
- Vendor Invoices
- Sales Records: Spanning Digital and Physical Reports
- Merchant Charge Statements
- Tax Returns
- Asset & Liability Reports: Including Digital and Physical Assets, Equipment, Intellectual Property and Real Estate
- Any Relevant Legal Documents
Vendor Agreement & Third-Party Contracts
The operations of a business will often depend on existing contracts with vendors and other third-party entities. Depending on the nature of your business, these vendors might include suppliers, manufacturers, shippers, developers, fulfillment centers and more, essentially anyone that has a standing contract with your business.
In order to keep up with operations, prospective buyers will want to ensure that those contracts will stay intact once ownership is transferred. Vendors may try to renegotiate terms or cancel contracts once ownership has changed hands. It’s common for buyers to want some sort of reassurance that vendor relationships will remain intact or even solidify continuation of the same terms that are already in place.
Documentation & Legal Due Diligence
This step revolves around the business structure. During this period business owners will be asked to present any articles of incorporation, business registration, trademarks, leases, tax filings and any existing reports that might detail legal issues that could be passed onto new owners.
Working With A Broker: Due Diligence Made Easy
Creating a thorough profile of your business operations can feel overwhelming, but experienced business brokers are able to simplify the process by putting their industry knowledge to use.
What to Expect From a Broker:
- Document Preparation
- Organized Presentation
- Effective Communication
- Prompt Addressing of Discrepancies
- Access to a Network of Professionals to aid with legal and financial due diligence
With Jason Brice on your side, due diligence is a breeze.
