PREPARING FOR DUE DILIGENCE

Due diligence is effectively a commercial audit of your business.

Offering insights into your finances, legal position, culture, and operations, it provides both you and your successor with full transparency before you enter into an agreement.

Due Diligence

The process and subsequent recommendations can verify, or even increase, the sale value of your business. But it can also give your buyer leeway to negotiate the price.

Preparation is key to ensure you resolve any issues before they are highlighted.

Managing The Process

Due diligence is a demanding process, requiring a huge time commitment. Having the details of your business interrogated can be draining and may pull you away from running your organisation.

Advance preparation is crucial to lessen the impact. Factor due diligence time scales into your upcoming and current activities. This will ensure that your focus doesn’t slip from achieving your objectives.

Make sure you are consulting with your advisors. They will help you plan for possible questions ahead of the process commencing.

Filing History

Your tax returns, annual accounts, and confirmation statements all need to be up to date and any HMRC enquiries need to be resolved.

Employee Contracts

Review employee contracts to ensure that there are no discrepancies in pay and benefits.

Supplier and Customer Contracts

You may have made verbal or informal agreements with suppliers and customers. Having these agreements in writing is paramount ahead of a sale.

Property Contracts

Property and lease agreements often cause problems during a sale. Unresolved issues will raise questions for your buyer and their legal representatives.

IT and Software Contracts

You need to be able to show that you are fully compliant with any software licences, including the number of users per agreement. This will show your buyer that they have access to fundamental software.

Quality of the Back Office

Your paperwork and internal record keeping is likely to influence the multiple that is applied to your profit level. If the administrative burden on the buyer is lessened, it’s easier to argue for a higher value.

Management Information

Detailed accounts, cash flow forecasts, and an overview of your marketplace will show you have a sound understanding of your business. Click here for more details on strengthening your management information.

Litigation, Creditors and Debitors

Old litigation, legal claims, creditors and debtors will need to be dealt with. Your buyer won’t want to be lumped with liabilities after completion.

Statutory Records of the Company

Statutory records need to be properly maintained. This will show that the current and correct shareholders and past dividends have been properly recorded.

Customer Relationship Management (CRM)

Ensure your CRM system is up to date and any old data is removed. This will lessen the burden on the buyer, especially if you deal with a large number of customers.

What Will The Buyer Focus On?

From a buyer’s perspective, due diligence provides verification on their investment before they commit to purchasing your business. Buyers will actively be looking for risk, liabilities, non-compliance, and other issues.

Typically, the level of investigation into your business will be driven by the amount that the buyer is investing.

It’s impossible to predict the questions you will be asked during the due diligence stage. But getting your house in order will ensure that you’re prepared.

Advice tip

Businesses can lose team members during due diligence if they indirectly find out you are preparing for a sale. Ensure that the deal remains confidential until plans are consolidated and you are fully ready to communicate your exit intentions with the rest of the business.