Buying a company is not too different from buying a small B2C product — the buyer wants to know how the product works and, most importantly — if they’re getting good quality.
However, buying a company works on a much larger scale. Instead of merely skimming reviews, a potential buyer requests more information through a process called due diligence — looking at everything there is to know about a business.
Due diligence requires extensive preparation: Get started with the tips below.
What is Due Diligence?
Due diligence is when a buyer requests specific information from a business to examine its current value and whether it’s worth purchasing. The buyer also uses this information to identify any risks or roadblocks that could affect the buying process.
Due diligence can be categorized as hard or soft:
- Hard due diligence looks at objective data about a business, such as financial statements, bank statements, and legalities.
- Soft due diligence uses a more qualitative approach, focusing on factors like management quality, operational efficiency, corporate culture, and employee relationships.
The due diligence process begins once both parties sign the letter of intent (LOI). The letter of intent outlines the terms of due diligence, including but not limited to:
- What specific information the buyer examines
- Proposed price
- Estimated timeline of the whole process
- What specific assets the buyer purchases
According to IBEX Middle Market Business Brokers, the due diligence process may last from a few weeks to several months (and sometimes more). The timeline could depend on the number of requests, the size of the business, and other factors.
How to Prepare for the Due Diligence Process
Here are four tips to help make the due diligence process a bit smoother:
Gather Necessary Information for the Buyer
When it comes to gathering information for the buyer, the company usually provides this in three main categories. These are:
Financial due diligence: This assesses the company’s overall financial condition and covers all financial records over a specific period. This may include:
- Tax statements
- Income statements
- Bank statements
- Cash flow statements
- Breakdown of sales and gross profits (by customer, product, monthly, etc.)
- General ledger accounts
- Financial projections
Legal due diligence: This covers all regulatory requirements and checks if the company and its employees adhere to compliance standards. This also looks at any litigations against your company, including litigation files, claimed damages, claimant details, and similar. Some other legal information buyers may look for includes:
- Articles of incorporation
- Corporate bylaws
- Intellectual property
- Contracts with suppliers, stakeholders, employees, etc.
- Shareholders agreements
Operational due diligence: The buyer examines your company’s internal processes and operations, including the physical investments (like equipment or real estate) these processes require. Other things to consider include:
- Supply chain management
- Production methods
- Inventory
- Marketing and sales strategies
- IT systems
Create a Team of Advisors
You might be asked questions that can only be answered by experts: This is where putting a team of advisors from different fields together comes in handy. A team of experienced professionals can provide guidance and respond to buyer requests, taking a load off your shoulders while you keep your company running.
Your team can consist of:
- Financial advisors or accountants: They help with budgetary documents, financial modeling, and the gathering and analysis of financial data.
- Lawyers or legal professionals: They offer legal insights and walk buyers through the legal proceedings of purchasing a business, as well as the company’s previous or current litigation experiences (if any).
- Business consultants: A business consultant provides insights into a company’s business model, competitive position, operational risks, and other strengths and weaknesses that could influence a buyer’s decision.
- Valuation experts: Valuation experts give the buyer a clearer understanding of how much the company is worth. This includes market value, potential investment risks, net worth, and more.
Centralize and Protect Key Information and Records
Selling a company involves sharing trade secrets, customer information, and other sensitive data with your buyer. This may include:
- Customer lists
- Marketing strategies
- Business plans
- Contracts
- Shareholder records
Before sharing this information with a buyer, make sure it’s organized and stored in a safe and secure place, such as a cloud storage service or a data room. Not only does this make it easier to access, but it also protects it from unauthorized users.
Protect your company information by having your buyer sign a nondisclosure agreement (NDA).
When an individual signs an NDA, they agree not to disclose any of the included information without prior authorization.
Address Any Issues Immediately
If your company has any unresolved issues, address them as soon as possible. Unresolved issues delay the due diligence process and may even cause a buyer to request a lower selling price or back out of the deal altogether.
For example, if there’s a discrepancy in your financial statements, investigate it as soon as possible and see if it’s just a minor error or if it could lead to a bigger issue. This is also a chance to revisit all documents to ensure they’re accurate and updated.
Another example of this could be unpaid taxes or debts. Settle outstanding payments promptly to help avoid delinquencies.
Talk to a Professional Advisory Team
Due diligence can be a daunting process. With so many things to keep track of and many factors coming into play, it’s inevitable to encounter an obstacle or two. That’s where having a professional team can be a huge help.
Finding the perfect advisory team could mean the difference between a closed deal and a lost opportunity. Business brokers are professionals who help you navigate due diligence, along with valuation, marketing, negotiation, and getting your business in front of the right buyers. They keep everything on track, helping lead to successful transactions and satisfied buyers.
