As a business owner your main function is to keep your business running profitably. However, when an offer is made and accepted through a letter of intent for the purchase of your business, another priority is established – providing due diligence information to the prospective buyer.
You, as the business owner, want to have a team assembled who are competent and knowledgeable professionals familiar with the process of selling a business. Your accountant/CPA, transaction attorney (not the guy that handled your brother’s divorce), financial advisor and professional business broker (preferably with the designations of BCB - Board Certified Broker and CBI - Certified Business Intermediary) are the team members you want assisting you.
Your professional business broker should be the “quarterback” in controlling and managing the tasks that others are performing in the due diligence process. The broker will prepare a timeline with milestones that should be part of the letter of intent. The timeline should be adhered to if at all possible. Time is a killer in business sale transactions.
It is to your benefit to have as much due diligence information and documents available as possible prior to the start of the process. Again, time is a killer in deals and you don’t want your slow response to seem as an indication of not wanting to complete the due diligence list.
What will a prospective buyer want to see before they complete the purchase of your business? Due diligence check lists can consist of one page of information developed by an individual buyer or 30 pages from a private equity group or corporate entity.
Each deal varies, but at a minimum tax returns for at least the last three years as well as the profit and loss statements that were used in preparing the tax returns. Customer lists, vendor contacts and when to meet key employees must be managed carefully.
Your professional business broker will also be in a better position to advise you on when, what kind and how much information to release. Some buyers find a boilerplate list of due diligence items on a web site. Your broker can remind them that some information is not pertinent to a business like yours.
“Year to date” profit and loss statements will be expected as well as an up to date balance sheet for the most recent reporting period.
It is best to disclose early any potential “red flag” problem(s). Pending litigation, outstanding liens or judgments, major personnel problems or loss of major customers are all items that prospective buyers do not like to find as surprises. Such problems that pop up may cause renegotiation of the price or be grounds for cancellation of the letter of intent.
Remember, even though you are in the midst of selling your business you do not want to mentally “check out” or become “retired in place”. You should continue to run it as if you were going to keep it for another five years. You don’t want the buyer to change their mind if something happens during due diligence that negatively affects the business and you have disengaged from the daily operations.
Let your professional sell side M&A advisors work with you and the buyer to make the due diligence process smooth.