Understanding Due Diligence An Integral Part of Selling Your Business
Hi Suraj here and you must be doing well, today I want to discuss over the Understanding Due Diligence- an Integral Part of Selling Your Business. You know when you’re looking at selling a business, one of the things that you’re going to have to do down the road is go through a due diligence process. We find that buyer out there and they sign a letter of intent, or maybe they even get to a purchase agreement, but there’s going to be contingencies in those documents saying that “The only way I’m going to close this transaction is if I successfully go through the due diligence process.”
When you’re trying to sell the business you’re giving them information. You’re saying “We made this much money. The business looks like this. These are the things that we do.” The question is, do they blindly believe you, or do they want to check it out before you get paid? Certainly they want to check it out and make sure you aren’t lying to them, they don’t know you. That process of checking the business out is called due diligence.
Due diligence is a process of looking at things like tax returns and financial statements for the last 5 years. Looking at your employee base. Maybe even interviewing key employees. Looking at your employee benefit programs, customer contracts, concentration of customers, vendors, looking at the leases that you have on the property. They go through all kinds of minutia and detail to make sure that you are representing the business well to them and they understand what they’re getting into. Wise buyers do that, so wise sellers need to be ahead of the game.
Too often when I’m helping people buy businesses and we get into the due diligence process, the sellers are totally unprepared to give us the information we need. It slows the process down and creates the opportunity for the thing to come apart, rather than to make its way to a closing and actually get the business sold. You as a seller would be very well instructed to get your due diligence information together early, like before you’re attempting to sell the business.
To do that you can visit with an attorney, or a CPA, or a business broker, or someone who understands the process of selling a business and what due diligence is. They can make a request of you. A mock request if you will that says “these are the things that I’m going to want to see before I buy your business.” If you take and put those things together now, and if they coach you in putting those things together in a format that’s easy for the buyer to read and understand, you’re going to be miles ahead.
Then, after you’ve entered into the letter of intent or the purchase agreement, you’re ready to go. You’ve got 90% of what the buyer wants to see ready to go. You can keep the process moving. You’ve got momentum, you’ve got the letter of intent, you’ve got the purchase agreement, things are going in the right direction. Don’t derail it by having a poor due diligence process. Let’s make sure that you get it done ahead of time, and you’re ready to go. Understand what your obligations are, what you’ll be required to do, and do it smart.