Due diligence when buying or selling a business
- September 2021
- 5 minutes
In this article, we’ll look at the due diligence procedures to follow when buying and selling a company.
When purchasing a business, the fundamental goal of due diligence is to guarantee that there are no unexpected difficulties or liabilities. Even though due diligence exists to safeguard the buyer, all parties must have a complete understanding of the process.
As a seller, you’ll be prepared to answer a buyer’s questions. As a buyer, you’ll need to know what questions to ask and what kind of information to expect, so you’ll be more likely to discover anything suspicious (if any).
Preparing to sell a business
As a seller, your preparations must begin the moment you start to entertain the idea of selling your business. Simply put, you must be mentally prepared and actively begin placing and preparing your firm for sale several years in advance.
When you complete your own thorough, consistent, and honest audit of your business ahead of time, you’ll create a favorable environment for when it’s time to sell. As a result, you’ll be able to dodge a barrage of suspicious queries from potential buyers.
Always think twice about making major changes to your company at this time. What you may think are minor, unobtrusive changes could be easily misinterpreted at the point of sale.
When the time arrives to list your business for sale and invite bids from prospective buyers, there are several things you must consider:
A seller’s checklist
Disclosure: It sends a strong message to potential purchasers that you are negotiating in good faith if you are ready and eager to share the required information about your firm. Even better, you could compile a comprehensive seller’s pack containing all the details a buyer will need. Above all, you must resist the temptation to conceal information with negative connotations. When things come to light later on, it will do even more damage.
Before granting potential purchasers access to sensitive business data, you must have them sign a non-disclosure agreement (NDA) to safeguard your own business interests. Your legal advisers should prepare this document.
Legalities: Any legal concerns that may affect the buyer’s rights and obligations if they become the new owner of your business should be disclosed. This could include ongoing litigation, employee issues, client contract conditions, intellectual property rights, and property and company asset ownership, among other things.
Deal fatigue: Avoiding deal fatigue; which may prompt a keen buyer to eventually withdraw, is largely down to thorough sale preparation, a good understanding of due diligence procedures, and a commitment to respond to buyer requests in good time.
Avoid surprises: Don’t introduce undisclosed material at the last minute. Not only would this irritate your potential buyer, but the lack of trust will make them suspicious of anything you’ve already disclosed. Honesty is always rewarded.
Preparing to buy a business
As a buyer, your due diligence begins long before you are ready to commit to a viewing.
You must first find your ideal location, determine your budget (also ensuring your figures are realistic for what you wish to acquire), and then narrow down your options from the list of businesses for sale which meet your criteria. Once you have chosen a selected few, your meetings with the respective sellers are likely to focus on the following elements:
A buyer’s checklist
Finances: Ensure you obtain details of the company’s financial profile (eg profit/loss ledgers, debt information, plus all the accounts of any wholly-owned subsidiaries). Remember too that Companies House can provide buyers with company reports, annual returns, and up-to-date accounts.
Market conditions: Almost irrespective of any standard valuation, you should carefully establish the price that comparable businesses are changing hands. This research gives you a clearer understanding of the metrics which influence this pricing. In addition, tracking business sale figures over time will help you gauge the relative stability of the sector and identify the significant trends.
Operations: You must guarantee that you obtain all pertinent operational information. Company procedures, operational locations, staffing information, management team structure, inventory, and suppliers, as well as customer relations information and comprehensive details of the company’s insurance coverage, will all be included.
Full disclosure: You can only make a purchasing decision once you have all of the necessary information. The legal principle that applies here is ‘caveat emptor’ (buyer beware). As a result, it is up to you, the buyer, to determine what risks the potential purchase may entail.
Growth potential: When buying a business, part of your due diligence should include a review of the company’s growth potential in order to estimate the likely return on your investment. This entails examining performance and profits as well as identifying the specific elements that drive the company’s value.