If you are a business owner who is interested in selling your company, take some time to assess your operations before embarking on the sale process. Prospective buyers want to understand what they are purchasing. They will scrutinize every facet of your business—and you’ll want to be prepared.
They will examine your financials, corporate documents, personnel records, contracts, patents, licenses, and any other indicators of your business’s health. The best way to avoid unpleasant surprises during this audit and maintain leverage in negotiating a sale price is by performing your own due diligence with the help of an investment banker beforehand.
This is your chance to study your business inside and out from the standpoint of a third-party buyer. This phase involves pulling detailed historical data on your company, recasting financial statements, and describing your business’s “secret sauce.” Your investment banker will guide you through the process, pointing out any deficiencies as well as strengths. Armed with this information, you can address any issues before the buyer’s review.
Once you’ve decided the time is right to sell your business, the last thing you want is to have an unforeseen issue derail the transaction. Below, we list the actions you’ll need to take and a few key points to consider during this process to ensure no major issues crop up during the buyer’s due diligence.
1. Gather documents
Collect all documentation relevant to the financial health of your business, such as financial statements, tax returns, contracts, licenses, permits, employee records, and insurance policies.
2. Organize and review the documents
Review all the information to ensure it is complete and up to date. This includes identifying not only any missing documents but also any discrepancies that could raise concerns for the buyer.
3. Address any outstanding issues
Identify any issues that could affect the sale, and take steps to resolve them—before the buyer’s due diligence process begins. These could include renewing expiring contracts, paying off debts, resolving legal disputes, or meeting regulatory requirements.
4. Review employee contracts
Review the contracts and agreements you have with your employees to ensure that they are valid and up to date. Consider offering retention plans or bonuses to key employees to prevent them from leaving during the sale process.
5. Demonstrate regulatory compliance
Ensure that your business complies with all applicable laws and regulations, such as labor laws, environmental regulations, and tax laws.
6. Prepare for site visits
If the due diligence process will involve a site visit, make sure that your physical location is well maintained and that any necessary repairs or improvements are completed prior to the visit.
7. Identify and disclose any potential issues
Prepare to be upfront and transparent about any potential issues or risks associated with your business. It is better to disclose these issues early on rather than confront them when the buyer raises questions during the due diligence process. Helping a potential buyer understand the risks and how to mitigate them yields the best chance for a successful sale. Hiding potential liabilities erodes trust and will almost certainly kill the deal.
8. Calculate a defensible EBITDA
Most people approach EBITDA adjustments the same way they approach tax write-offs—in an aggressive, yet defensible, manner. But there is no faster way to lose credibility with a buyer than to be overly aggressive in recasting or inflating your EBITDA. When trust is lost, value declines, and nobody wins. Work with your accountant or CFO along with your investment banker to ensure your adjusted EBITDA serves your interests but is also fair and accurate. Keep track of expenses, and make sure you have documentation to support your adjustments. The buyer will insist on seeing proof that these adjustments are real.
9. Make net working capital (NWC) adjustments.
Normalized net working capital is something buyers and sellers have been negotiating for years. If you can ensure that your business has had no significant declines or leaps in working capital in the months leading up to the transaction, that will make the determination of NWC easier at closing. Your investment banker can help you address this early in the due diligence process. For example, if you have invested too much in NWC, your investment banker can guide you through correcting this so buyers can see your business operating with lower working capital requirements. The buyer won’t accept lower levels of working capital without proof that the business can be run this way.
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The due diligence process may seem like a daunting and invasive proposition, but if you approach it correctly, it can position you to achieve maximum value from the sale of your business. While nothing is foolproof, hiring and working with a reputable and trusted investment banker will give you the best chance to realize this goal. An investment banker approaches the transaction aligned with your goals. But because they bring fresh eyes and an outside perspective, they will likely identify potential due diligence issues that you would not have noticed. They also have the expertise to address these problems, giving you a smoother sale process, a stronger negotiating position, and, ultimately, greater value from the sale of your business.
