Making the decision to sell your business is a
hard thing to do, but completing the sale can be
even harder. Once you have found a qualified
buyer, the real work begins. For the next few
months, you and the buyer must work through
due diligence, an investigatory process where
both parties obtain all the information needed to
complete the transaction.
Preparing for the process:
In due diligence, there is no specific rules or
order that must be followed, and the length and comprehensiveness depends entirely upon the
company and the parties involved. To prepare
for due diligence, simply ask yourself, "If I am
going to buy/sell the business, what would I want
to know?"
Because the majority of due diligence is driven by
buyers, sellers should begin preparing even
before the business goes to market. Buyers will
inevitably request to see many documents,
review inventory, inspect the facility and
equipment and scrutinize the financials. By
preempting the demands, sellers can significantly
reduce the stress and frustration. Keeping your
business running smoothly before and during due
diligence is also important. The price buyers
agreed to is dependent upon the quality of the company's performance, and any “blips” on the
interim financials statements can reduce the
value. To ensure that this situation does not
occur, assemble a team of professionals
(intermediaries, attorneys and accountants) who
will help you mitigate some of the demands
during this critical period so that you can stay
focused on running the business.
Buyer's side:
The meat of due diligence begins once a letter of
intent is signed. Supplying documents will be cumbersome, but it is important for sellers to
review each document and understand what they
are presenting. The following are some of the
most commonly requested items:
Financial statements: Buyers will dissect financial statements to review historical earning trends, potential adjustments to EBITDA, financial ratio analysis and working capital trends. They are also
looking for any anomalies or unusual
revenues or expenses.
Account receivables: When looking at account receivables, buyers are looking for aging accounts receivable more than 90 days old, write-offs and allowances for bad debts.
Inventory: Inventory records will help buyers understand the speed of turnover, slow-moving inventories and inventory accounting and pricing practices. Buyers will also look at various asset schedules for depreciation methods.
Contracts & licenses: Buyers and their professional advisers will scrutinize contracts, leases and agreements with vendors and customers. They may also look at permits and licenses to ensure that the business is operating legally.
Tax returns: By reviewing the tax returns, buyers will attempt to understand the tax accounting method, depreciation method and inventory method. They will also want to understand any net operating loss, carryovers or other significant tax positions.
For buyers, due diligence is a time to make sure
that the company's working condition matches
the seller's claims. Many business owners may
be surprised to know that buyers tend to be more concerned with what they do not know than with
the problems that they know. As such, be candid
with the buyer. Any surprise they discover on
their own will cast suspicion onto the sellers and
the companies, potentially ruining the
transaction.
Seller's side:
While due diligence is imperative to buyers, it is
equally important for sellers to conduct their own
research. During this period, sellers should take
time to observe and understand buyers'
backgrounds, their financial wherewithal and
determine if they have the right management
experiences and expertise to run the company.
It is also important for the buyer and seller to
have similar views regarding the company's
future. The sale of a business is both a financial
and emotional decision, and oftentimes the seller
wants to know that the company will continue to
grow and be profitable. This becomes especially
crucial if a portion of the transaction is structured
as seller financing or earn out.
Conclusion:
To survive due diligence, remain calm, honest
and cooperative. Do not underestimate the need
to do your own due diligence and hire a
competent team of professionals to help you
through the process. Just remember, although
the process may be cumbersome, a handsome
reward waits at the end.
