Effective Sell-Side Due Diligence – Part 1

Coal Miner With Pickax - In the DarkWhen I represent business owners who want to sell their business, one of the pivotal issues we encounter is how to execute “sell-side due diligence.” It’s more important than ever before for sellers to establish trust with potential buyers from the very earliest stages of the buy-sell process. Sell-side due diligence (sometimes called seller due diligence) is an essential component of any comprehensive Exit Plan, and it is never too early to begin this process. Over the next few posts, I want to take the mystery out of sell-side due diligence so you, as a business owner, understand how important it is and how to approach it.

The recession has changed more than just numbers on paper. If you’re currently starting the process of exiting your business, you’re probably aware that the apparent value of your business has diminished over the past two years. For reasons I’ve discussed recently (see my post on “5 Reasons to Sell Your Business Now”), it may actually be a very good time to sell your business. Investors are looking for great deals, and a good Exit Planning professional on your team can help you position your company attractively to buyers. But one change the recession has brought about is not so tangible, which is that buyers have become much more wary of the possibility of hidden problems with a business they’re considering acquiring.

The best way to ensure buyer confidence when you put your business on the market is to do your due diligence as a seller first, before the buyer begins looking at your business. You must put yourself in the position of your potential buyer and ask: What would I want to see if I were considering acquiring this business? What would convince me that there are no hidden liabilities to this transaction that will cause trouble in the future?

If you pay attention to sell-side due diligence, you will position yourself and your business as being credible, transparent, and financially solid from the get-go. When you can present prospective buyers with clear, detailed information about your business before they even begin to do their own due diligence – you rise head and shoulders above many sellers who take the approach of disclosing as little as possible in the early stages of a transaction. This will pay off in the end, since the strong credibility you establish with your prospective buyer early on puts you in an excellent position when the time comes to negotiate the terms of the deal. Good sell-side due diligence means a smoother transition, fewer surprises on both sides, a quicker closing, and more money in your pocket at the end of the day. In my next two posts, we’ll look at how to approach seller due diligence and what to include to ensure a strong position for you as you plan your exit and the sale of your business.

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About Gary T. Brooks

Gary T. Brooks has over 27 years of experience in the investment banking industry and has been involved in over 100 transactions. He is currently the CEO of ExitPlanPros, where he helps business owners grow their business while planning their exit.

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