Due Diligence - most likely you have come across this term as you prepare your business to be on the market. It is the process by which a buyer conducts an investigation related to financial, legal, operational, and other business-related aspects of the company they are interested in purchasing. However, it is important to note that sellers should also perform their own Due Diligence, known as Sell-side Due Diligence, to ensure success when selling their business.
What is Sell-side Due Diligence
Sell-side due diligence is a way for sellers to proactively ensure the company they are selling is presented in the best possible light by discovering and rectifying any potential issues before buyers do. Performing this exercise will maximize the chances of a favorable outcome in a deal.
For sellers, it is crucial to begin preparing for Sell-side Due Diligence early on. Sellers should begin preparing far before the business goes to market.
As you start your preparation, ask yourself: “If I was a buyer, what information do I want to know?” Remember, the buyer is a stranger to your business, they are unaware of the granular details that you may pass off as obvious. So, providing them a comprehensive list of information gives the buyer the confidence to move forward.
Read more: How to Sell a Business
Why Do It?
Due Diligence is crucial for business owners to perform in order for a successful deal. There are many benefits to Sell-Side Due Diligence such as:
- Ensuring the business is presented in the best way possible
- Maximizes favorable terms and sell price
- Uncovers concerns and red flags before the buyer does
- Noticing these issues beforehand allows the business owner to remedy them
Useful Tips
Remember, time kills deals. If you are spending time creating and organizing documents requested by the buyer for their Due Diligence at the time it is requested, there will be a time lag where the buyer will be left waiting and this could cause them to lose interest.
In addition to preparing your financial documents, customers list, business contracts, tax returns, licenses and permits, lease agreements, insurance documents, employee payroll, employee handbook, and list of assets, consider these questions:
- Why am I selling?
- Can I show that my business is profitable and sustainable?
- What is my valuation (sell price)?
- Am I dispensable - can the business remain operable without me?
- Why is the buyer interested in my business?
- What experience does the buyer have?
- What is their financial ability - how will they pay for the purchase of the business?
- Does the buyer have any experience in purchasing a business?
Knowing the answer to these questions comes in handy when you and the buyer are going through the deal process.
When thinking about Due Diligence, usually research done by a buyer comes to mind. However, the seller as well, can and should perform Due Diligence. Although it may be a lot of work to perform sell-side Due Diligence, it will pay off in the end as it will allow for a better and more successful buyer relationship and deal.
