If you hope to sell your business, or at least be ready when an acquirer approaches, you need to be prepared for the immense scrutiny of due diligence. For many owners, it’s an exhausting and stressful process. And for some, it tanks the deal. The right steps can help you navigate this potentially challenging process, so you can attain a deal that’s in everyone’s interests. Partner with a knowledgeable business broker to get the process right.
Due Diligence Process
Prior to the formal commencement of due diligence, sellers and buyers should take a number of steps to make the process flow more smoothly. Founders who want to get the most for their company should use this time wisely, to cultivate curb appeal and make their business look great.
When due diligence begins, you’ll need to hand over a range of documents to the acquirer, including stockholder information, intellectual property contracts, corporate records, regulatory and insurance documents, leases and other real estate documents, and financials. You’ll essentially have to document every claim you make about the business.
The final phase, quality of earnings, confirms that the company is financially helpful. It can be difficult to subject your business to this level of scrutiny, but it’s absolutely necessary if you want the buyer to feel comfortable proceeding.
Getting Ready for Due Diligence
Companies commonly struggle with due diligence. Most investment banking firms and M&A advisors find that what they do early in the process is a key predictor of how it will unfold. If you fail to lay down a strong foundation, due diligence can be disastrous.
Before a buyer begins investigating your company, you need to do it yourself. Look at your company through the eyes of a risk averse buyer. What are its biggest weaknesses? Is there anything you can do to address these, or at least to bolster your strengths and put the buyer’s mind at ease?
You can be the one to uncover and fix your company’s weaknesses. Or you can leave it to someone else—and that someone will likely expect a decrease in company price for their trouble.
This is why the expertise of an M&A advisory firm can be so valuable as you prepare. Advisors can help you prepare the right documents, develop your answers to pointed questions, and ensure your company is on track to manage the challenges of due diligence. Incomplete answers are often worse than delayed answers, so preparation is critical.
Think of this process as similar to a mechanic looking over a car they are preparing to buy. If you do everything you can to get the car into good condition ahead of time, then there’s nothing to worry about.
Selling a company can be difficult. It can even feel like a full time job. But the effort and expense you put into preparing for due diligence will be well worth it in the end. Buyers want to know exactly what they are getting. It’s your job to prove to them that it’s something worthwhile.