Selling a Business: The Due Diligence Period

Selling a Business: The Due Diligence Period

Selling a business involves several steps. One of those includes the due diligence period. This period includes the research and examination time after you receive a buyer’s offer. Because an offer isn’t a contract, there is still time for the buyer to back out. That is why this period of due diligence is so important. The due diligence process allows the buyer to dive into details and ensure your business is what they want. It also allows the seller to look into the buyer’s financial capacity. The due diligence period is essential to both the seller and buyer’s success. 

An important piece of the due diligence process is obtaining a business valuation. A valuation shows the financial status, fair market value, financial projections, and industry information. Peak Business Valuation, business appraiser, provides valuations for all industries across the nation. A valuation will help the due diligence process in many ways. It provides a fair market value and detailed information on the financial status of the business. For more information, please contact us below for a free consultation. 

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Steps to the Due Diligence Process

In the following paragraphs, we will cover the steps included in the due diligence process. 

Produce Company Statements

There are several documents a potential buyer will want to see before buying your business. With confidentiality in place, proceed to provide the following documents. These are a few of the documents that you will need to provide.  

  • Tax returns for the past three years
  • Financial statements for the past three years
  • Current statement of discretionary earnings
  • Financial trends and ratios
  • Accounts receivable and accounts payable
  • Inventory
  • Current building lease
  • Franchise agreement if applicable

As mentioned above, these are only a few of the documents needed in the selling process. Preparing these documents before listing your business helps the process go quicker. Sales often fall through during the due diligence period. This can be avoided if the seller and the business itself are prepared to sell. Be prompt in your responses to the potential buyer and willing to provide more information if needed. These documents will help the buyer understand the business’s financial situation. It is the first step to closing the deal. 

Obtain a Valuation

Next, one of the best ways to consolidate and understand these documents is through a business valuation. A third-party company like Peak Business Valuation takes the company’s tax returns, financial statements, projections, and more to determine a fair market value. As a seller, this can help you when listing your business and when negotiating a purchase price with the buyer.

The potential buyer is also advised to obtain their own business valuation. This valuation helps the buyer feel confident of the state of the business. A valuation report consolidates and organizes the financial information. Most buyers will request a third party to value the company before signing the purchase agreement.

Knowing this process, obtaining a valuation before listing your business can help you be more prepared.  Peak Business Valuation, business appraiser, would love to discuss your business in more detail. Understanding the fair market value of your business will help you determine a reasonable selling price. 

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Confidentially Disclose Key Information

When selling a business, your buyer will want some exposure to the business before signing the purchase agreement. This could include seeing employees, business contacts such as clients, and suppliers. To keep confidentiality of selling your business, consider a few of the following:

  • Confide in a small number of trusted managers
  • Limit the number of employees the buyer has access to
  • Allow buyer access to accountant and attorney
  • Determine how the buyer contacts the business

Selling a business can affect many individuals. This can make the process even trickier. To avoid difficulties, consider all your options before going public about the decision. 

Choosing a buyer is a crucial part of the success of the business in the future. The transition will either make it or break it. Put in place structures, training, trusted individuals, and document everything. Leave nothing to chance and be professional at all times. 

Double-Check the Buyer’s Financial Capability

Just as it is important for the buyer to verify the financial status of the business, it is just as important for the seller to confirm the buyer’s capability. More often than not, a buyer won’t pay full cash for a business. This means payments will come into place. If a buyer can’t make the payments, that can affect the seller’s success. During the due diligence period, the seller should do the following. 

  • Analyze the buyer’s professional resume
  • Obtain references from the buyer
  • Discover the buyer’s plan for the business

As mentioned above, the transition period between owners is a very fragile time for a business. Make sure you choose a buyer that is the right fit for the business. The buyer’s credentials should pass with flying colors. The due diligence period is just as important for the seller as the buyer. For more information see Structuring a Business Transaction.

Summary

Failure to spend quality time on the due diligence period can create problems when selling a business. Due diligence allows both parties to ensure the buyer and seller are what they say they are. 

Peak Business Valuation, business appraiser, is a great place to start. A valuation will help both the seller and buyer feel comfortable and confident in the purchase process. For more information, please contact us by scheduling a consultation. We are happy to answer any questions you may have. 

 

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