Deciding to sell your business is a big step. Whether you built it from the ground up or acquired it and grew it into something bigger, a business can feel like part of the family. Determining a fair valuation and then finding a qualified buyer who can make the financial investment, and possesses the business acumen to keep the business going, can be difficult. That’s where due diligence comes in.
When we talk about due diligence, it commonly refers to the buyer’s side of the transaction. Certainly, buyers need to ask the right questions to ensure finances are in order, infrastructure is up to standard, and inventory records are correct. However, sell-side due diligence is often overlooked, but equally important.
Why sell-side due diligence matters
A seller needs to determine if the buyer can afford the acquisition and if he or she has the experience to run the company. Many sellers, especially those who have built a business from scratch, want to know that the buyer shares their vision for the future of the company. Sellers also need to look internally at their business, its valuation, and its potential future under new leadership. Ultimately, successful sell-side due diligence can reduce risk and accelerate the time to close.
The key to a successful due diligence process is for both sides to be honest and cooperative with each other. The sale of a business is as much about emotions as it is about finances, so you can’t let tensions boil over. Here’s how to conduct thorough sell-side due diligence.
Ask the right questions
Sellers need to ask questions of the buyer and of themselves during the due diligence process. Here are a few of the big ones:
- What’s my valuation? You’ll probably work with a business broker or investment banker to answer this question, but it’s critically important. Randomly slapping a number on your business isn’t going to work. You need to look carefully at your revenue, capital expenditure, and other financials to determine a fair business valuation that will withstand the buyer’s due diligence process.
- Why am I selling? This question will pop-up multiple times during the sales process, but you need a good answer, both for yourself and your buyer. Maybe you’re retiring or maybe you think you’ve taken the business as far as you can and a new leader can take it to the next level. Buyers won’t want to hear that you’re tired of arguing with employees and investors over the future of the company or that you no longer think your business is competitive in the market.
- Can the business run successfully without me? If you’re looking for a total exit, buyers won’t want to find that your expertise and leadership is critical to the future of the company. You need to prove that new leadership can find success in the business you’ve built.
- Can the buyer finance the acquisition? Once you’ve tentatively agreed to a sale, you need to ensure the prospective buyer can afford the acquisition. Lots of deals have crumbled because the buyer simply didn’t have the cash or couldn’t obtain the financing. If you’re comfortable with seller financing, that’s one option, but it’s important to make sure the buyer can afford the payments.
- What’s the buyer’s vision for the future? Some sellers will have little interest in asking this question. In some cases, you’ll simply want to sell and be on your way. In other cases, sharing a vision for the future of the business will be the most significant question you ask. You might even accept a lower offer based on the answer. If it’s important to you, have an open and honest discussion with prospective buyers about what their plans are for the future of your business.
This list is a great starting point for a successful sell-side due diligence process. In most cases, you’ll want a team in place that can help you ask and answer these types of questions. At the very least that team will include an attorney and a business broker, but depending on the size of your business it might include accountants and investment bankers. Being prepared and knowing who you need on your selling team will help ensure the best outcome for the sale of your business.