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How exactly does due diligence work?

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Due diligence only occurs when a prospective buyer develops a serious interest in acquiring your business. 

So, in some ways it’s like a property survey in that your buyer will want reassurance that your business for sale is free from any undisclosed defects and really worth the asking price.

How does due diligence involve the seller? 

A positive due diligence report will significantly boost your chances of selling your business. That’s why it’s important to engage an experienced professional team to ensure all aspects of your business are in the condition you describe. 

As a seller, your own due diligence preparation should be uniformly thorough and comprehensive, so that when the buyer’s team carry out the same investigation, you will already know your company has a clean bill of health. 

At a practical level, experts note that around 50% of potential sales fall through at the due diligence phase. And this is primarily due to the seller’s poor preparation and reluctance to disclose relevant business information. 

Professionals suggest that a proactive ‘upfront’ due diligence, for instance preparing a seller pack containing all the information a buyer would want to know, usually works best. 

What should you prepare? 

In a word – everything! You should anticipate the most probing questions a buyer might ask and be ready to answer them. 

This process is always more effective if you can adopt a buyer’s mindset. So, if you were thinking of buying the business, what exactly would you want to know? 

Your professional advisors will brief you in detail, but any would-be purchaser will want to examine financial records covering at least your last three years’ trading. This will reveal the underlying trends in your sales history and you should certainly expect to be closely questioned about any peaks and troughs on your balance sheet. 

In addition, buyers will want to know about legal aspects such as contracts, licensing, and will want to understand everything about the commercial environment your business operates in; including the identity of your main competitors. 

What will a buyer be able to find out? 

Your assumption should be that, assisted by a professional team, your buyer will be able to unearth virtually anything about your business. 

Therefore, don’t try to conceal anything a genuine purchaser would need to know to be able to buy with confidence. Seasoned due-diligence professionals always know what to look for and can quickly spot things which just don’t ‘add up’. 

Full, honest and open disclosure gives a buyer confidence, whereas the late emergence of undisclosed business debts or customer complaints which have gone to litigation can create a nightmare scenario. 

In this case your keen buyer will either walk away or expect you to sell very cheaply on the grounds that your deception casts doubt on every other piece of information you have revealed. 

Is anything off limits? 

In theory, a buyer can ask about anything that may impact the valuation – though it’s hard to see why anyone would want to know about your personal circumstances, for example. 

If there’s any information you do not wish to disclose, it’s important to take advice on whether this will adversely affect your chances of making a sale. So, the real question is: ‘As an interested buyer, would you want to know that information?’

On most occasions, many potentially sensitive aspects of disclosure can be overcome with the right approach. 

If you are asked to reveal information which could be commercially advantageous to others, then get your prospective buyer to sign a binding non-disclosure agreement. 

If there is a legitimate request to talk to your staff, customers or suppliers, then introduce your buyer as a trainee or potential business investor.

Above all, it’s creating an atmosphere of honesty and trust which will ultimately give your buyer the confidence to proceed. And if you can then negotiate in a peaceful frame of mind knowing there are no last-minute, due-diligence skeletons about to leap from the cupboard, then you will have maximised your chances of sealing the deal for the best possible price. 
By Jo Thornley, Head of Brand and Partnerships at Dynamis. Joining in 2005 to co-ordinate PR and communications and produce editorial across all business brands. She earned her spurs managing the communications strategy and now creates and develops partnerships between, and and likeminded companies.