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The Role of Due Diligence When Selling Your Business

If you’re ready to sell your business, you might not be sure what to expect. You’ve spent your life planning and growing your company, and you know your business inside-out – but that doesn’t necessarily mean that a buyer will inherently recognize the value of your business model. A buyer will want to understand all facets of your business, including the positive aspects it offers as well as any potential risks they might be taking on when purchasing your business. To gain this knowledge, they will usually undertake 60-120 days of due diligence.

What is Due Diligence?

Typically, once a Letter of Intent is signed, the due diligence phase of a potential transaction begins. This is an opportunity for the parties involved on both sides of the transaction to learn what they need to about each other and their assets.

Buyers’ Due Diligence

Buyers’ due diligence is an extensive examination of all aspects of your business, potentially going back to its inception, to determine if the potential future profits outweigh the risks of buying your business. At a minimum, depending on what type of business you operate, they’ll want to understand:

 – Financial matters, including at least the last three years’ worth of statements, as well as EBITDA and net working capital calculations

 – The terms of your contracts

 – Who comprises your management team

 – Tax and insurance information

This process can be overwhelming to a seller, but can be mitigated by being proactive and conducting your own due diligence.

Sellers’ Due Diligence

When you’re selling your business, due diligence should be an important part of your process as well.  First, you should conduct your own research on a potential buyer, so you can understand exactly why they are interested in your business, whether they can afford to maintain and grow it, and what their long-term strategy is for growth. All this information will help you determine if it’s a good fit for you and your employees, or if you should seek another buyer.

But, you shouldn’t stop there — you should also perform due diligence on yourself, ideally well before you engage in discussions with any potential buyers. Ultimately this will help to ensure that you get the most value when you sell.

Doing a deep-dive into your business model, financial statements, growth projections, human resources landscape, as well as your customer and vendor relationships will help you proactively identify any areas of concern. As a result, you have the power to resolve them in advance of getting into a sales process and potentially having your valuation take a hit or have the deal derail

Taking the time to thoroughly review your business will most likely shorten the length of time a potential buyer will spend conducting their own due diligence, as you can begin the conversation by offering your own initial research. “Time kills all deals” is a saying commonly used in the M&A world. The smoother and quicker you can make the diligence process, the more likely you’ll be to close a transaction under your original terms.

The intermediaries at Symmetrical have decades of experience helping business owners get the maximum value for their company, including performing preemptive due diligence to help minimize some of the risks that can come up during the diligence process. If you have questions on how to best prepare for diligence, please contact us for a confidential discussion.