Covering your bases during due diligence
Business owners who are not prepared for the austerity of the due diligence process may find themselves feeling vulnerable, explains Inc. contributor and investment banker Steven Sarwin: "If the owner is not prepared for the rigors of the due diligence, they will likely experience undue stress and potentially diminish their chances of securing a premium price for their life's work."
Make sure your financial records are demonstrably comprehensive and accurate. Since a buyer will need to explore the inner workings of your company in order to discover problems and redundancies—and to simply become acquainted with how it is run—obtaining "a comprehensive audit of your financial statements by a recognized accounting firm is a recommended strategy in advance of due diligence," Sarwin advises. This will minimize the invasive nature of the due diligence process, making the seller more comfortable, and has the added benefit of making the transition run more smoothly for the buyer.
The author also recommends that sellers provide their buyers with thorough, written documentation of the company's organizational hierarchy, hiring and training methods, pricing structure, and anything else that might be housed "'in the owner's head.'" For an optimal due diligence phase, the buyer must be confident that the business will be sustainable after the seller has made his or her exit. This is especially vital if the seller is a small business owner who has been the primary architect of the company's infrastructure and operations.
Lastly, Sarwin urges sellers to tie up any outstanding legal issues. "Owners who work with an experienced investment banker will receive guidance in all of these critical areas," he writes. If you are looking to sell, an M&A advisor could play a prominent role in preparing for the transition to new ownership. Reach out to a mergers and acquisitions firm to learn more about the due diligence process.