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Owners who plan to sell their businesses would be wise to prepare for the due diligence process a few years before the selling process begins. Due diligence by definition is an “investigation” and when it is applied to a business sale, it means the buyer leaves no stone unturned!

Why Is Due Diligence So Important?

After buyers and sellers sign a Letter of Intent (LOI) that outlines the purchase price for the business, the buyers will conduct a thorough review of the seller’s business. Every issue they find will be a reason to reconsider and reduce the purchase price, which is exactly what sellers DON’T want to happen.

What Can I Do to Survive Due Diligence?

There are many things that owners can do, especially if they start well in advance, to prepare for and expedite this buyer inspection. Here are some of the more essential tasks:

  • Disclose any and all current and potential litigation, claims, threats, and issues BEFORE the LOI is signed. Surprises will erode or wipe out trust between the buyer and seller very quickly.
  • Carry the appropriate kinds and amounts of insurance to mitigate unplanned events.
  • Obtain CPA audited financials from a reputable CPA firm.
  • Minimize the amount of personal expenses that are on the company’s books and be sure to document all of them annually so you can build a case for adjustments.
  • Clean up your team by eliminating the unproductive and “glass half empty” members who may cost you dearly in terms of both dollars and team morale.
  • Get rid of all clutter and put a fresh coat of paint on your entire facility; first impressions make a huge difference.
  • Create an electronic data room in a secure location and store copies of all important business documents in it. This would include all corporate filings, shareholder documents, board meeting minutes (yes, you need these!), customer and vendor contracts, tax returns, employee contracts, litigation claims, insurance, etc.
  • Have your attorney review your contracts to be sure they are assignable (can be transferred) to the buyer at the time of the business sale.
  • Document your compliance with all tax and employment laws, rules, and regulations.
  • Verify that you have no environmental issues, even if you do not own your building and you lease your space.
  • Be sure your shareholders are on board with your strategy to sell to an outsider at the LOI price, even if they do not own a controlling share. Disgruntled shareholders have been known to disrupt deals at the last minute.

Due diligence may last from a few weeks to 6 months or more, depending on the size of the business transaction. As we know, time can kill deals as buyers and sellers get weary, change their mind, and simply lose faith in the value of the transaction. Preparing in advance will enable sellers to avoid price adjustments and shorten the process, which minimizes company disruption and keeps advisory fees to a minimum.

You never know when a buyer may come along and offer to buy your business. Quality businesses employ solid business practices like those listed above, whether they anticipate a sale in the near future or not. Accomplishing these tasks takes time and resources. Don’t wait until you have an offer on the table to think about starting this process. If you do, it will most likely cost you dearly in terms of your dollars and your sanity during the stressful deal process.