Selling Your Business: How To Prepare for Due Diligence

Selling your business and preparing for due diligence is a labor-intensive process that can leave you feeling stressed and drained. The very process can take a minimum of three to six months and may not even be successful in the end. Being well-prepared and understanding what could go wrong and what could go right are key points to consider when making what will probably be the biggest professional decision in your life.

Related: What Information Is Required For Due Diligence

Business owners tend to see their businesses as children and when a prospective buyer contacts you with an offer that seems good (sometimes too good to be true), your reaction to selling your business may be more emotional than rational. This reaction is perfectly understandable, as only you understand the years of work and sacrifice that went into creating the business that you now run. Finding the best employees, creating a team of people who will do the work the way you think it should be done and working on their work ethics do come at a price: your time and the nerves.

Due Diligence

Due Diligence is the best way to weed out any buyers (and any companies to be purchased) that may not suit your needs and your ideas of what the next owner of your company should be. While preparing for selling your company, however big or small it may be, it is important to stay afloat: trying too quickly to judge your own company and paint over its fallacies will only give the prospective purchaser of your business a psychological edge over you and may push you into making less-than-ideal business selling steps.

Charting Goals and Progress
Charting Goals and Progress (by Isac Smith on Unsplash)

Selling Your Business Due Diligence Steps

Due diligence is a process in which a comprehensive appraisal of a business is made. There are several things that happen during this process, as the buyer wants to ensure that their acquisition of your business is going to be a venture that pays off within a reasonable period of time. They will generally look into the assets that your business has or owns, at the liabilities of your business and will finally use this information to estimate the commercial potential of your venture and how much profit it could bring to them.

Related: Complete Due Diligence Checklist

Your Business Assets and Due Diligence

1. Capitalization of Your Business

This is probably the most important step in due diligence of your company. In doing so, the prospective buyer tries to estimate the stock price of your company and multiplies it with the number of available shares. Alternatively, if the company is not publicly traded, they may establish the company value based on the following indicators.

2. Revenue and Profit Margins of Your Business

This is the next most important step in evaluating business assets: how much cash flow there is and how much of the revenue stays in the company. Obviously, the more profit there is the better, but a profit margin that is too high may signal future heavier taxation by the state or a profit margin that is too high. In the latter case, a competitor working in the same niche may enter the same market and offer lower prices - a lower profit margin may seem counter-intuitive, but will ensure access to the wider market and a lower volatility of the business. Unless you are in the luxury niche of your market, too much revenue that is not allocated can be a negative indicator for your prospective buyer. Make sure you understand where your money goes.

3. Buildings, Equipment, Stocks, the Employees and Their Education Level

Anything that your company owns will definitely determine the amount your buyer can offer. Make sure to communicate all the details correctly. Some translation providers can be of irreplaceable importance in this process, especially if you own assets abroad or are working with a foreign company who would take over.

4. Patents and Technology Owned and Leased

While buildings and equipment may be subject to amortization and will depreciate in value, any patents and technology you own may increase in value, especially due to the compounding effect if properly managed.

Related: How Is Intellectual Property Valued?

Your Business Liabilities and Due Diligence

1. Loans, Credits and Any Due Obligations

Any obligations not yet paid out will simply lower your company’s value. No buyer would ever take over the financial obligations of a mismanaged company burdened with debt unless the price of the company was lowered by the amount owed to other parties.

Related: How to Sell a Business With Debt

2. Employees Benefits Plans

Some companies offer none, some offer a lot of these. Both approaches have their pros and cons. Lower employee benefits mean less expenditure, but also dissatisfied employees who may leave the company at a certain point. On the other hand, employee benefits mean a higher expenditure every month, but may result in satisfied workers who are more likely to stay with the company even during hardship.

3. Any Regulation That May Come in the Way

Especially when working with foreign clients, make sure to use translation services. For example, Translate Hub may offer help in better understanding the cultural standpoint of whoever would acquire your company, but it will also present them with certain aspects of your market that they may be dissatisfied with. It is professionally mature to work WITH and not AGAINST the acquirer.

4. Any Production Process Optimization To Be Done

Production process optimization is always a big thing to handle: any new machines and additional employee training can cost a fortune, and a company that has not been optimized in a long time may also mean workers who are set in their ways and may not be willing to change the way they work.

Understanding the Complexity of Due Diligence in Any Business

These are only some aspects of your business that you may want to present to a prospective buyer. Although this may seem bothersome and may take a long time to finish, it is your duty and best practice to actually present all these details to your prospective buyer. One way or another, they will learn about all these aspects of your business. If you are the one to present the buyer with both positive and negative sides of your business, you will be able to better negotiate the price and the terms of overtake and will probably profit more. Alternatively, hiding anything may give your buyer an unfair advantage and may cause you a significant drop in the estimated value of your company.

Final Thoughts

Although preparing for Due Diligence when selling your business may seem like too stressful, following the steps outlined above and using common sense and some hindsight can help turn this stressful process into a more manageable experience. Frustration aside, it is a complex process that has to be undertaken seriously, since any mistake in this process can cost you a lot of money in the long run. Buying and selling businesses does happen almost daily, but the business selling market is based on bargaining, where both sides try to protect their acquisition and their wallet. Understanding these simple streams can benefit you the best.

Published by ExitAdviser


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