What do you need to know about due diligence?

19/12/2022

Any potential buyer will want to know that the business they are buying is in good shape and due diligence will play a critical part in this.

But what does due diligence involve?

Essentially, you need to be honest with potential buyers.

You might think that your business is at the top of its game but, for an outsider, buying your business will not be risk-free.

They will want an accurate summary of how owning the business would impact them, including both the risks and the benefits.

What will buyers want to know?

Of course, every buyer won’t have the same questions. But they will want a general overview of the business’s operations.

To protect your business, you should consider implementing a non-disclosure agreement (NDA) before revealing sensitive information.

Once you are satisfied that your business’s information is in safe hands, be prepared to answer the following:

• What is the business’s cash flow position?
• Do you have any outstanding debts or liabilities?
• How do you organise your accounts? Do you use any specific software?
• Are your contracts up-to-date?
• What is the business’s structure? How will this impact the sale?
• Does your business have policies and procedures in place? What are they?
• Do you have the relevant contracts in place to legally employ workers?
• Have you fulfilled your tax obligations?

You need to address any concerns the buyer may have, so that they can make an informed decision about buying the business.

How can you prepare?

Whilst you need to be honest with potential buyers, you want to make sure the truth isn’t off-putting.

So, you want your business to be in the best position at the point of sale.

The first step is to evaluate your business’s current performance. A SWOT analysis is an effective way to pinpoint the business’s strong points and areas of concern.

You should do this well in advance of putting your business on the market to optimise your operations before the sale.

Even if there are still some risk areas in the business, you can demonstrate to the buyer that you have attempted to address these and have a plan in place.

Our next blog will cover what to do if a deal falls through.

Need advice on exit strategies? Get in touch.