If you’re selling a business, due diligence is the process by which your buyer requests from you as the seller any documents, data, and other information about your company. The buyer then reviews the information and documents to identify any potential liabilities or roadblocks that could affect the transaction. Due diligence typically involves reviewing business financial statements, operations, and legal documents. The buyer may also want to meet with your business’s management team and customers to get a better understanding of your business.
The purpose of due diligence is to identify any potential risks or liabilities associated with your business.
Sadly, Buyers do sometimes use this information (particularly any ‘issues’ discovered) to renegotiate the purchase price or to decide whether or not to proceed with the transaction.
Due diligence is an important part of any business sale. By conducting due diligence, your potential buyers can make informed decisions about whether or not to acquire your business. Of course, due diligence works both ways. You want to make sure that you are selling your business to the right buyer.
What are the three principles of due diligence?
There are three key principles of due diligence from your point of view as the seller of a business:
- Timeliness: As a buyer, you want to conduct due diligence on the target business in a timely manner so that you have enough information to make an informed decision about whether or not to proceed your business to them. As a seller, its important that you are well prepared and have all (or at least most) of the key information ready to hand.
- Thoroughness: You want to be thorough in your due diligence so that you are aware of all of the risks and liabilities associated with the target company. Equally, as a seller, it is important to provide full and clear information so that you cannot be sued after the sale occurs.
- Objectivity: You want to be objective in your due diligence, so that you are not influenced by your own biases or emotions.
Key areas of due diligence
Here are some of the key areas that should be covered during due diligence:
- Financial statements: The buyer should review your business’s financial statements to get a clear understanding of your organisation’s financial health. This includes reviewing the business’s income statement, balance sheet, and cash flow statement.
- Operations: The buyer should understand how your business operates. This includes reviewing your marketing plan, sales strategy, and operations manual.
- Legal documents: The buyer should review your business’s legal documents – such as the articles of incorporation and contracts.
- Customers: The buyer should meet with your customers to get a sense of their satisfaction with your company.
Different types of due diligence
There are many different types of due diligence that can be conducted, including financial due diligence, legal due diligence, and operational due diligence. The specific type of due diligence that is conducted will depend on the specific business and the buyer’s or your needs as the seller.
Due diligence can be a complex and time-consuming process. The buyer wants to make sure that they are buying a viable business, and you want to ensure that you’re selling their business to a legitimate entity that doesn’t pose any significant risks.
If you are not familiar with the business world, it is important to hire a qualified professional to conduct due diligence on your business. This will help to ensure that the due diligence is conducted thoroughly and objectively.