When selling a business, due diligence is a crucial step in the process. It refers to the investigation or examination of a business by a potential buyer to verify its financial, legal, and operational information.
Due diligence is critical for both buyers and sellers, as it helps to ensure that the sale is fair, transparent, and meets the needs of both parties. In this article, we'll explore the importance of due diligence in selling your business and how it can impact the sale.
What is Due Diligence in Selling Your Business?
Due diligence is a comprehensive investigation of a business by a potential buyer to evaluate the company's financial, legal, and operational aspects. It typically involves a thorough examination of financial records, legal documents, customer contracts, employee records, and other key aspects of the business.
The purpose of due diligence is to provide the buyer with a clear understanding of the business they are acquiring. This helps the buyer to assess the risks and opportunities associated with the business and make an informed decision about whether to proceed with the purchase. The usual case is though that rather than be a process to decide whether or not to proceed with the purchase, its is more to make sure that there is nothing wrong and no reasons to not proceed with the purchase.
Why is Due Diligence Important in Selling Your Business?
There are several reasons why due diligence is critical in the process of selling your business:
Verification of Information: Due diligence helps to verify the information provided by the seller about the business. This helps to ensure that the buyer has accurate information about the business and can make an informed decision about the purchase. Also to ensure that the information and details that have been disclosed by the seller are true and accurate and can be verified to a certain degree.
Risk Management: Due diligence helps to identify potential risks associated with the business. This includes legal and financial risks, as well as operational risks such as gaps in management or employee retention. Identifying and addressing these risks before the sale helps to reduce the potential for disputes and litigation after the sale is completed. At Dexterity Partners, this is one of the key areas we address in our fit to sell and fit for the future analysis that takes place at the start of any deal we are involved with. We ensure that any potential issues are identified and addressed long before due diligence gets underway, and long before we even start talking to interested parties. It is always better to have any issues identified early as if they pop up out of nowhere when a buyer is undertaking their due diligence, then the risk of the deal falling through or price reductions increase dramatically.
Valuation of the Business: Due diligence provides an opportunity for the buyer to assess the value of the business. This includes examining the company's financial statements, assets, liabilities, and other factors that impact the value of the business. Usually Due diligence is done after a value has been agreed, and as such it is more about confirming the value and the offer from the buyer, rather than determining a value from scratch.
What Does Due Diligence Cover in Selling Your Business?
Due diligence covers a wide range of aspects of the business, including:
Financial Records: Due diligence includes an examination of the company's financial records, including balance sheets, income statements, and cash flow statements. This helps to verify the company's financial performance and identify any issues that may impact the value of the business. Most buyers will want to understand all the aspects of the financials and ensure everything is in order, as such this is usually a larger portion of any due diligence work.
Legal Documents: Due diligence includes a review of the company's legal documents, including contracts with customers, suppliers, and employees, as well as any litigation or regulatory issues that may impact the business.
Employee Records: Due diligence includes a review of the company's employee records, including contracts, benefits, and compensation. This helps to identify any issues that may impact employee retention or the value of the business.
Operations: Due diligence includes an examination of the company's operations, including management structure, supply chain, and production processes. This helps to identify any issues that may impact the efficiency or profitability of the business. Also it is to help a buyer understand how the business operates day to day, how things are run and that they understand how to ensure that there is a smooth transition post purchase with minimal, if any, disruption to day to day operations.
Conclusion
Due diligence is a crucial step in the process of selling your business. It helps to verify the information provided by the seller, identify potential risks, confirm the value of the business, and provide a foundation for the sale & purchase agreement between the buyer and seller. As a seller, it's important to be prepared for the due diligence process by organising and maintaining accurate financial, legal, and operational records. By doing so, you can help to ensure a smooth and successful sale of your business.
At Dexterity Partners, we ensure that this is addressed from day one in our fit to sell and fit for the future analysis. We prepare all the information, review and analyse it to ensure any issues are identified and rectified at the start of the process. As such once the due diligence stage is reached, all the information is ready to go for the buyer and there should be no surprises that can pop up and any that were present have all been found and addressed long before the buyer starts looking.