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How to sell your business: #6. Preparing for due diligence

Mutual trust established during negotiations can easily collapse when the buyer begins trawling your accounts, speaking to customers and auditing employees. Here’s how to navigate due diligence safely.

A thorough buyer will conduct due diligence to confirm information presented in the initial sales pitch and identify any red flags (all the more reason to prepare your business for sale properly). Being prepared for questions a buyer might have, and having all supporting documentation ready, will greatly aid the process.

Just put yourself in the buyer’s shoes and be prepared to answer the questions you’d want answered.

What to expect during due diligence

An investigation into business history and trends

The purchaser will want to look at sales targets, profit margins, overheads and working capital, to see if there is consistency in the numbers and if any areas can be improved.

If there have been irregularities – perhaps there was a downturn in numbers for a short period – a purchaser will ask for explanations.

Talking to customers

The best way for a buyer to rate products and services is to talk to current customers.

How long have they been a customer? Do they use the competition and, if so, why?

The buyer will also assess your relationship with the customer, the impact a change in ownership may have, and gauge how much they want you to help post-sale in order to effect a smooth transition.

Talking to suppliers

Similar to the customer conversation, due diligence will also uncover outstanding debts, how the business is perceived by its suppliers, how it compares to any competitors with whom they have a supplier relationship, and if a change of ownership would impact on supplier agreements.

Investigating and comparing financials

Due diligence allows a potential buyer to check that sales forecasts and projections are realistic.

Any customer and supplier comments could be tallied against information supplied by the business itself and any industry benchmarks available. Are the pictures being painted similar?

Balance sheets will be compared and the buyer may request a comprehensive audit and assess whether any outstanding debts are manageable.

Talking to and auditing employees

A buyer will audit employees against any industry pay agreements – are they above award rate? They will also check employee turnover against industry norms.

Employees may be asked if they will stay or leave following a change of ownership. A buyer will also want to know which employees can help them most in effecting a seamless transition.

How you can smooth the due diligence process

Due diligence pays off, with angel investors reporting that those who invested 20 hours or more in due diligence were five times more likely to get a return. So it’s worth taking a few steps to pre-empt due diligence in order to achieve the best sale negotiation.

Set up a digital due diligence folder

Create a digital folder – using a cloud storage provider like Dropbox or Google Drive – containing documents related to your company and requests made in the due diligence process. You can then share this folder in response to a due diligence request.

In the form of documents, organised into folders, this online repository of information allows you to define information flow in advance rather than prepare each piece on demand. It also makes you look professional to your prospective buyer, helping to solidify their initial interest.

And preparing ahead of time forces you take a hard look at the inner workings of your business before you sell and gives you time to make any necessary adjustments.

Typical things requested from sellers as part of a due diligence checklist:

  • Organisational charts
  • Past financials and projections
  • Management reports
  • Stockholder communications
  • Customer and supplier agreements
  • Credit agreements and loan obligations
  • Partnership or joint venture agreements
  • Articles of incorporation
  • Shareholder arrangements
  • IP-related agreements
  • Government authorisations

And preparing ahead of time forces you take a hard look at the inner workings of your business before you sell and gives you time to make any necessary adjustments.

Other useful, customised documents you may wish to include:

  • Customer acquisition channels
  • Case studies of key customers
  • A list of customers in your sales pipeline
  • A spreadsheet with your company’s key metrics: your revenue, users, growth rates, customer acquisition cost, lifetime value, etc
  • A financial plan for the next three years

Other useful, customised documents you may wish to include:

  • Customer acquisition channels
  • Case studies of key customers
  • A list of customers in your sales pipeline
  • A spreadsheet with your company’s key metrics: your revenue, users, growth rates, customer acquisition cost, lifetime value, etc
  • A financial plan for the next three years

It may appear overwhelming, but being prepared saves you time and gives you a better chance of sales success.

If due diligence proceeds without a hitch then you can finalise the sale with the help of a solicitor with expertise in business sales.

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