Many business owners think that selling their company is simple – “clean” it up a little, find a good intermediary, and then wait for the offers. But it is not that simple. There is something called the “due diligence” phase.
Buyers want to know what they are buying. They want full disclosure. No surprises. That’s what buyers use “due diligence” for. Eliminate the surprises.
The due diligence phase can last from one to three months. Maybe longer, it depends. The best way to speed the process along is to have all the information that a buyer would want to see gathered together in a readable, easy-to-understand format before the selling process even begins. This is especially true regarding financial information.
Not doing this upfront – not preparing well – leaves the seller vulnerable to repeated requests from the buyer for information thus slowing down the sales process. Momentum can be slowed. And when selling a business, speed is of the essence.
The best approach is to prepare beforehand to make sure everything goes smoothly.
Besides the usual data about the company, some of the areas that may concern a buyer and should be disclosed quickly are:
- Tax Issues
- Environmental issues and risks
- Pending and threatened litigation
- Undisclosed, off-balance sheet liabilities
- Intellectual property ownership and licensing terms
- Employment agreements
- Upcoming replacement requirements for assets, new equipment that will be needed soon, overall condition of existing assets, and so on.
- The personal situation of the owner may affect the sale or value of the company.
- Anything else that is unusual or one-time that can affect value
If there is some negative about your company, as a seller you should get that information out there right away. Don’t wait. If the buyer has to scrape and dig to find the negative information, they will be suspicious that there is more. More bad information. And that the seller may be hiding something.
Don’t hide bad information from the buyers. That will likely harm the chances of the sales ever reaching the closing. Additional terms (reps and warranties) will likely be added. Bad information will also cause the buyer to request (demand) a decrease in the sales price.
And the seller, having to deal with the requests and issues caused by the prior hidden information coming forward, may be forced to neglect business operations. Financial results may deteriorate giving the buyer another opportunity to demand a decrease in sales price.
Without preparing ahead of time, and disclosing all material items to the buyer right away, due diligence can become a massive problem for the seller. Don’t be that person.
