In Part 2 we talked high-level about the process of selling a business. We briefly mentioned the due diligence process.
In this part, we discuss the due diligence process in greater detail.
Properly preparing for the due diligence process will give you a better chance at getting your desired sales price and avoiding any surprise roadblocks. If you do your due diligence ahead of time, you can clean up any issues before the process starts and make sure it goes smoothly for you and your buyer.
Step 3. Clean Up Your Act.
First, you will need to perform an internal due diligence review which includes business, legal and accounting due diligence. Go through all legal and financial documents with your internal team to define problem areas and determine how to resolve them. Focus on any due diligence issues that affect key vendors, suppliers, strategic partners, key contracts and intangible assets (like intellectual property)
Internal Due Diligence
This internal due diligence review is done in advance of any external due diligence performed by a potential buyer.
A competent buyer will perform their own rigorous due diligence review and they will want to speak to your vendors, suppliers, strategic partners and customers. By doing an internal due diligence review ahead of time, you will have a good idea of what the buyer will experience during their own review of your business and will be able to have any outstanding issues resolved or mitigated before the buyer spots them.
Second, you will need to clean up your financial statements with a professional financial or accounting advisor. Consulting an accounting or financial professional ahead of time about what financial information a buyer will request, can help keep the process flowing and will make sure you have everything ready for the buyer’s inevitable scrutiny of your books.
Make Needed Changes Now
Your due diligence review will likely unearth some unsettled issues. It is critical to take the time and spend the money to deal with these issues before they are discovered by a buyer so they do not threaten the sale. Whether it is a forgotten annual corporate filing, contract dispute, regulatory compliance issue or a disgruntled employee threatening an employment law claim, deal with the issue as soon as possible.
Get Out In Front of Problems
If there are problems you can’t fix, be sure to tell the buyer about them early on, before the buyer finds them for him or herself. If the buyer’s business team doesn’t find the issue, the buyer’s legal and accounting team probably will. Failure to disclose important business problems will undermine your credibility with the buyer at the very least. It may kill your deal. Or set you up for post-closing litigation.
Consider Improving your Value
Improved company value usually (but not always) equates to a higher purchase price. Improving the value may include many things. It may be as simple as resolving the problems you found during your due diligence clean-up. It may also mean making some overdue cuts in personnel, overhead, or other expense items.
Be aware, however, that some spending cuts may increase EBITDA, but actually reduce the valuation. Similarly, postponing the sale to increase revenue may not increase the overall valuation.
Remember to assess owner compensation from a buyer’s point of view. Many privately-held businesses have owner perks, such as cars, airplanes, club memberships, travel perks, etc. Consider reducing or removing these items in advance of the sale. You don’t want to have to explain to the buyer how these items can be added back into cash flow.
Your Second Decision Point
After performing the due diligence review and cleaning house, you have a chance to review your decision to sell. You may decide, after this review and cleanup, that you’d rather keep your business, and implement some new initiatives, and perhaps sell in the future. That decision in itself might be the best result from going through this process.
In the next part, we’ll look at ways to manage the terms of the sale – if you still want to sell your company.