Due Diligence: What Sellers Need to Prepare For

When you decide to sell your business, the due diligence process is a critical step that can make or break the deal. This investigation period allows the buyer to verify all the information you’ve provided and assess the true value and potential risks associated with your business. Preparing thoroughly for this phase can ensure a smooth transition and increase the likelihood of a successful sale. Here’s what you need to know about what sellers need to prepare for during the buyer’s due diligence process.

1. Financial Documentation

Buyers will meticulously examine your financial records to verify the accuracy and health of your business’s financials. Be prepared to provide:

• Profit and Loss Statements: Detailed statements for the last three to five years.
• Balance Sheets: Current and historical balance sheets that reflect the business’s financial position.
• Tax Returns: Complete tax returns for at least the last three years.
• Cash Flow Statements: Documents that show the inflow and outflow of cash within the business.
• Accounts Receivable and Payable: Lists of outstanding debts and credits.
• Bank Statements: Statements for the past year or more.

2. Operational Records

Operational efficiency and stability are key factors buyers will consider. Ensure you have:

• Employee Records: Information on all employees, including roles, salaries, and contracts.
• Vendor and Supplier Contracts: Agreements with key suppliers and vendors.
• Lease Agreements: Details of property leases or ownership documents.
• Inventory Lists: Comprehensive lists of current inventory.
• Equipment Lists: Details of all major equipment and assets, including any leasing agreements.

3. Legal Documents

Legal compliance and any potential liabilities are crucial aspects of the due diligence process. Be ready to provide:

• Business Licenses and Permits: All necessary operational licenses and permits.
• Contracts and Agreements: Copies of all major contracts, including customer contracts, partnership agreements, and service agreements.
• Litigation History: Any past or ongoing legal issues, lawsuits, or disputes.
• Intellectual Property: Documentation of patents, trademarks, copyrights, and any other intellectual property rights.

4. Sales and Marketing Data

Buyers will want to understand your market position and customer base. Prepare:

• Customer Lists: Detailed lists of key customers and sales records.
• Sales Reports: Data on sales performance, trends, and growth metrics.
• Marketing Strategies: Information on past and current marketing strategies and campaigns.
• Market Research: Any market research or industry analysis you’ve conducted.

5. Business Processes and Systems

Documented business processes and systems indicate a well-run, transferable business. Have ready:

• Standard Operating Procedures (SOPs): Detailed SOPs for all major business functions.
• Technology Systems: Information on all technology systems used, including software licenses and IT infrastructure.
• Quality Control Processes: Documentation of any quality control measures and procedures.

6. Human Resources

The stability of your workforce can be a significant factor. Ensure you have:

• Organizational Chart: A current chart that outlines the structure of your organization.
• Employee Manuals: Manuals that detail company policies and procedures.
• Training Programs: Information on employee training and development programs.

?Conclusion

The due diligence process can be exhaustive, but thorough preparation can significantly ease the buyer’s investigation and enhance your credibility. By organizing your financial records, operational data, legal documents, sales information, business processes, and HR details, you provide transparency and build trust with potential buyers. This diligence not only facilitates a smoother transaction but also positions your business in the best possible light, ultimately helping you achieve a successful sale.

This post was originally published at https://www.ericimendelsohn.com/