In this article for business owners who are looking to sell their business in the future, we discuss why preparing for due diligence well before a sale can help protect both the value of your business and the likelihood of completing a deal.
You may have spent years building a profitable business and believe you know exactly what it is worth. But when you come to sell, a buyer will want evidence to support that value.
The due diligence exercise is how and when they look for it.
Problems uncovered at this stage can result in a buyer renegotiating the price, changing the deal structure or, in some cases, walking away. Approximately only 10% of business sales progress without any changes to the deal structure post due diligence.
The good news is that many of these problems can be addressed before a buyer ever sees them.
1. Can you prove your profits?
A buyer will want to understand your underlying profitability and normalised EBITDA.
They will look closely at:
- Historic financial performance
- Management accounts and forecasts
- One-off or exceptional costs
- Owner and director remuneration
- Revenue recognition
- Working capital requirements
- The assumptions behind any adjustments to EBITDA
If the numbers cannot be reconciled easily, confidence can quickly fall. Do you have regular management accounts, clear KPI summaries and explanations for unusual figures?
2. Is the value more than the numbers?
A buyer is not only paying for your historic profits. Increasingly, they are paying for the gaps you can fill in their own products, services, technology or supply chain – value that can matter as much to a large acquirer as it does to a smaller one.
Being able to demonstrate this clearly, through a well-evidenced value chain enhancement narrative, does more than support your asking price. The buyer’s own due diligence team will be reporting back to their board or investment committee, and ticking every compliance box is not enough for them – they need to be able to say with confidence that this is a genuine, value-adding acquisition.
3. How dependent is the business on you or a few key customers?
A profitable business can still carry significant risk.
High customer concentration, reliance on one supplier or an owner who remains central to every major decision can all affect value.
Consider what would happen if you stepped away for three months. Could the management team run the business without you?
Reducing key-person dependency can make your business considerably more attractive to a buyer.
Speak to us about how we can support you in building, and financing, your team as part of your exit planning processes.
4. Are your contracts and records in order?
Due diligence extends well beyond the accounts.
Buyers may review:
- Customer and supplier contracts
- Employment contracts and incentive arrangements
- Team structure, succession planning and staff retention
- Property leases
- Intellectual property ownership, and the wider know-how, trade secrets and invention-disclosure process behind it
- Tax and regulatory compliance
- Data protection
- Processes, policies, systems and IT
- Insurance
- Previous disputes or litigation
A robust succession plan, a clear intellectual property and innovation process, and up-to-date systems all reduce a buyer’s perceived integration risk – and the less risk they see, the less reason they have to chip away at price.
Issues do not necessarily prevent a transaction. Surprises are generally more problematic than the issues themselves.
5. What else could reduce the price?
Agreeing a headline valuation does not mean that is necessarily what you will receive.
Working capital, debt and cash levels can affect the final proceeds through the completion mechanics. Buyers may also seek warranties, indemnities or deferred consideration where they identify additional risks.
Understanding these areas before negotiations begin puts you in a stronger position.
6. Start your own due diligence first
Vendor due diligence allows you and your advisers to look at the business through the eyes of a potential purchaser.
This gives you time to correct weaknesses, improve information and prepare explanations for issues which cannot be changed.
Treat this as an ongoing discipline rather than a one-off exercise before a sale. Revisiting it regularly tends to improve how the business runs day to day, whether or not you sell within the next few years.
It can also make the eventual sale process faster and reduce opportunities for a buyer to chip away at the agreed price.
Talk to us
This shows that due diligence should not begin when a buyer sends you their information request, or only when a sale feels imminent.
If selling your business is a possibility within the next few years, now could be the right time to uncover what a buyer would find, before they do.
If you would like to discuss preparing your business for due diligence and a future sale, please contact and speak to our Corporate Finance and Advisory Director: Glenn Fletcher FCA glenn.fletcher@nicholsonsca.co.uk