Our due diligence process can help you get the best value for the sale of your business. Knowing how and when you conduct it could result in a successful closing of your deal – not following the process could result in your deal falling apart.
I advocate that sellers complete the due diligence package before going to market with their business because they will improve the marketability of the company, and they will receive more at the settlement or closing. Here are a few reasons for preparing your company for sale, and why sellers should perform the "up-front" due diligence process:
The Due Diligence Process
After a buyer and seller agree to the terms of the sale, the buyer initiates a review process to verify that the information presented by the seller is accurate and complete. Known as due diligence, the approach is a straightforward exercise that really prepares both the buyer and seller for a favorable business transition. Buyers confirm the seller's representations, and sellers highlight the favorable qualities of the company.
Sellers who prepare their due diligence materials in advance help all parties understand any critical issues in the company. More importantly, the process helps sellers know what kind of questions to expect from potential buyers.
Generally, JMR Capital assists with the preparation of the due diligence package, indexing the information based on the business' general operating practices – key customers, sales and revenues, employees, operations, vendors, financial data, and corporate and legal information.
Finally, the due diligence package becomes valuable input for preparing the marketing materials, illustrating the company's highlights, selling features, and overall marketability. It truly positions the company for sale. Sellers promote the positive aspects of the business while preparing themselves to address any critical issues found resulting from the due diligence process.
Preparation and organization send a powerful message to business buyers. These buyers want to deal with serious sellers and companies that engage in pre-deal due diligence reviews. Buyers are attracted to opportunities, especially those that are polished with high-quality due diligence materials. And, good information can yield offers -- faster.
Some Other Tips:
- An organized company results in more confidence for buyers regarding their purchase decision. The value? A closed deal sooner rather than later.
- A closed deal sooner benefits both parties by reducing the time frame for possible information or confidentiality leaks.
- Buyers don't make offers because they can't get their questions answered. Access to up-front due diligence results in more offers, and more offers result in higher transaction values.
- Often, business owners wait until they accept an offer, then respond to the buyer's requests for information. Identifying potential problems and addressing them early in the sale process through up-front due diligence reduces the risk of an unfavorable discovery late in the deal, causing the need for renegotiation.
- Preparing due diligence materials before the company goes to market allows the seller to keep his or her focus on running the business while the company is on the market. Missed revenue or operations forecasts due to owner distraction can result in a lower selling price or an adjustment in the terms of the deal.
Up-Front Due diligence – Time well spent gathering and organizing information before putting the company on the market to reflect a company that is committed to the selling process.
Written by Mark Richardson for the Institute of Certified Business Counselors