19 Sep A Seller’s Guide: 5 Areas Reviewed in the Due Diligence Process
The great financial crisis of recent years has had a profound impact on how businesses are bought and sold. Increasingly, buyers and investors—along with key advisors and consultants—are performing more thorough due diligence examinations.
As a seller, it is important to think about the buyer’s perspective when entering into a deal. After all, it’s in their interest to know as much as possible about the business they’ll be buying. Understanding the due diligence process can help you properly prepare and set realistic expectations.
There are several areas of due diligence. These include:
- IT and Environmental
- Culture and Values
1. Business Due Diligence
Investors and prospective buyers will need to gain an understanding of how sustainable your company is in terms of revenue and cash flow. They will examine your past performance, industry trends, and the state of current operations. In addition, they will also be assessing future growth potential. You can expect questions on various aspects of your business operations, including:
- Products and/or services
- Vendor relationships
- Accounting practices
2. Accounting Due Diligence — Quality of Earnings Report
This step in the process is a critical one and may take some time and resources. Expect investors, your CFO or controller, and any internal accounting personnel–as well as an outside CPA firm– to be heavily involved. Quality of Earnings diligence is typically one of the first review steps taken after a Letter of Intent is signed. Buyers and investors want to be sure the business earnings represented to them are accurate.
For a smooth review, ensure that your financial statements are maintained, organized and prepared. In addition, be prepared for a due diligence firm to present their request for documents, to spend time on site, and to ask lots of questions. It’s their job to double-check everything for their client.
3. Legal Due Diligence
The main purpose of legal due diligence is to identify risks and liabilities. This includes the common risks and liabilities that are inherent to a particular industry or business in addition to those that may go unnoticed or undisclosed.
Lawyers will examine extensive legal matters including those related to your business’s:
- General corporate structure
- Material contracts
- Human resources
- Compliance with any and all regulatory matters
In this stage, you may collaborate with multiple advisors and consultants as legal matters touch nearly every aspect of a deal.
4. IT & Environmental Due Diligence
Technology is becoming more and more integral to businesses and industries of every size. If a company’s primary product or service is based on a proprietary technology or technological capability, then it is imperative for a potential buyer or investor to ascertain any risks associated with how the technology is implemented and maintained.
Also critical is whether or not the technology can grow and develop on the same scale as the business in the future. Even small or mid-sized businesses with technology as simple as a website or email communication can still present risks.
Likewise, though not every business is overtly impacted by environmental concerns, issues related to environmental regulation, health and safety can still be significant if not properly identified.
5. Culture & Values Due Diligence
Culture and values are intangible and not easily defined, but such aspects of a business are integral to its future success and can be strong determinants when closing a deal.
Conducting due diligence in these areas is admittedly difficult. Some sources of information that a prospective buyer or investor may utilize include:
- Internal documents
- Communications that reveal how employees interact
- Employee exit interviews
- Interviews with former employees
- Information from customers
- Communications with external vendors and suppliers
Of course, interacting with the owner, chief executive and other members of leadership is often the best way to learn the truth about the health of a company’s culture and values.
The due diligence process is a complex step in any transaction. The more that you understand what the process entails, the easier it will be to prepare. Your thorough preparation will make it easier for the various stakeholders in the process to work together toward a successful outcome.
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New York Business Brokerage (NYBB) specializes in the confidential sale, acquisition and valuation of small to mid-sized privately held businesses. Since 2003, NYBB has been dedicated to serving clients with professionalism, integrity and confidentiality. As an innovative leader in the business brokerage industry, NYBB continues to raise the bar by establishing itself as one of the most trusted and respected names in the business buy/sell marketplace.