Are you thinking of selling your business?

In 2018, 10,312 small businesses were purchased in the United States, and in the past 5 years, the number of business sales has been on the rise. Good news for owners looking to sell their businesses, however before a business transaction, extensive due diligence is carried out by both seller and buyer. During a business sale, due diligence is a rigorous process with the intent to establish the history, health, and viability of the business offered for sale. It’s not a one-sided affair; both parties involved in the transaction have their own interests to consider. So, we’re going to take a look at a seller’s due diligence and some of the key performance indicators you should look out for.

An overview of business seller due diligence

A business seller’s due diligence will most often begin by knowing the kind of buyers you are interested to attract. Once the target buyer market is established, seller’s representatives perform extensive background checks on interested parties before you start sharing company documents with them. Once all business buyer prerequisites are satisfied, sellers may make initial contact with prospective buyers.

Once initial contact has been made sellers will then receive a list of requirements from the buyer or buyer’s business acquisition advisor. This list may come through the buyer’s law firm or broker. Among the buyer’s requirements, expect to see a request for legal, accounting as well as financial information. While you may have access to all of the necessary documents, a business broker can organize and package the commonly-requested details so you’re ready well in advance of engaging a buyer.

You can submit most of the required documentation through virtual data rooms, reducing printing and postage, additionally making secure information sharing near-immediate.  As you prepare your business for sale, consider these tips to prepare you and the business for seller-side due diligence.

1.   Ensure your company’s papers are in order

With over 30 million small businesses in operation across the United States today, providing employment to 47.8% of the country’s workforce. Your business may not be the only one that prospective buyers are looking at. When selling a business having your papers in order can ensure a faster transaction.

Provide the buyer with the required documentation they need in order to make informed decisions. Remember, hiding things will only put buyers off and more often than not, the truth will come out. Also—and this is big—be sure that Non-Disclosure Agreements (NDA) have been signed prior to sharing information.

2.   Bringing a professional onboard can be helpful

Mergers and acquisitions are not a walk in the park. They can quickly become messy and complex, demanding a lot from both the buyer and seller. As the seller, throughout the entire ordeal, you’re still expected to run the business, and because of this, you might not be able to give your attention fully to everything the buyer is requesting. This is where bringing in a business broker who is familiar with the intricacies of M&As becomes useful. Engaging an experienced mergers and acquisitions team provides the experienced counsel regarding the value of the deal or advise you to keep looking for a better offer.

3.   Research your buyer and get to know them better

As you conduct your business seller due diligence, ask questions of your prospective buyer: Has this potential buyer closed any deals in the past before? If yes, how smooth were the transactions? How are the businesses they’ve bought fared to date? Answering these questions about potential buyers are particularly important because they can help you weed out the tire-kickers and poorly-matched buyers. Not every buyer who makes an offer proceeds with the transaction, which is why ample buyer research ahead of time will save time and headaches . Remember, that you as the seller are always in control. You don’t have to accept the first offer that’s put on the table. A better buyer may come along.

4.   How does the buyer intend to finance the deal

Never take the financial aspect of selling a business for granted. Every detail should be discussed. During business sale negotiations, you will hand your financial papers to the buyer so they can see the company’s financial health. You also have a right to know the buyer’s purchase financing source. It is imperative that all aspects of the deal, including funding source and timeline are put in writing. It is also worth knowing that the first offer you receive doesn’t have to be the one you settle for.  If the deal becomes difficult to close or too many red flags or concessions are made on your part, consider pursuing other offers.

5.   Understand what the buyer intends to do with the business

There are some buyers who buy businesses in order to merge and grow their current enterprise. There are those who simply purchase businesses so that they eliminate competition in order to dominate an industry. Part of your buyer research should include asking the buyer their intentions with the business, which may influence your decision to sell.  Mergers and acquisitions can be stressful for owners, and potentially more so on the employees post-sale, as their role may be changed or eliminated once the new owner takes control.  While often not a primary concern, part of your offer consideration should include the future of the workers you hired, trained, and employed to bring the company to the point of sale.  An effective business deal includes a healthy transition of ownership or merger between companies to ensure the viability and long-term value of the business being sold.

Get in touch with one of our advisors to learn more about how Sun Acquisitions can help during business mergers and acquisitions.

Disclaimer: Any information provided in this blog is not intended to replace legal, financial or taxation advice given by qualified professionals.