Every business sale goes through a process of due diligence. This is when the potential buyer delves into the details of the business’ finances and operations to gain a greater understanding of the reality of the business. And, to reduce risks associated with the purchase.
This can be a grueling process. Both parties should prepare for the level of scrutiny involved.
As a seller, the best way to prepare for the due diligence process is to make sure all the information you provide is accurate and complete. Avoid any manipulations or gamesmanship that skews the data.
Misleading information will be uncovered during this process. This will only slow the negotiations and could lead to an antagonistic relationship that may even kill the deal.
Financial due diligence
This is a deep dive into financial data. It can be the most intensive portion of the due diligence process.
It involves an examination of the income statement, balance sheet, and cash flow statement. You may engage an external accountant to handle this work.
Buyers will want to review the accounts receivable, accounts payable, and the general ledger along with a listing of all accounts.
Projections, capital budgets, business plans, schedules of deferred income, security deposits, and all liabilities will be reviewed.
Operational due diligence
This includes a review of products and services currently provided and under development, along with complaints and warranty claims.
Buyers will also want to review customer lists and gain insights into current management and employee turnover.
Contracts and customer agreements will be reviewed. Buyers will need to know about certifications, awards and even smaller details like software licenses.
Due diligence is a critical step toward the end of a business deal. As the seller, make sure you’re forthcoming with information to help close the sale. As the buyer, pay close attention to each piece of information you uncover. It’ll help you determine if this business is still the right purchase for you.
Have questions about the due diligence process? Let’s talk!