If you’re preparing to sell your business, you should know that a slow due diligence process is one of the greatest threats to completing a deal. Time kills deals, and as you get your business ready for a sale, you should do everything you can to prepare for a smooth due diligence process.
Disorganized accounting data, missing documents, and unresolved tax liabilities are just a few of the many potential speed bumps that could cause concern for buyers or investors. Those concerns lead to delays, and those delays may ultimately upend the entire negotiation.
Thankfully, business owners can prevent these setbacks by preparing detailed, accessible financial records in advance of taking their business to market. This guide to preparing for the due diligence process identifies each step that business owners should take to clean up their books ahead of an upcoming sale.
G-Squared Partners supports clients with decades of combined experience overseeing M&A transactions. Our Exit Planning Advisors have guided many organizations through the due diligence process and have supported both buyers and sellers in successful transactions.
The Due Diligence Process Explained
Imagine you were buying a used car. Everything might look great from the outside, and the car might ride smoothly on your test drive. But before you actually agree to buy the car, you’ll want your mechanic to take a look under the hood, run some tests, and ensure that everything is functioning properly.
Due diligence is the same: except instead of a used car, it’s a business that’s being bought and sold. During the due diligence process, the buyer will conduct their own ‘under the hood’ inspection of your business: examining your books, verifying key contracts, and more. By examining your company in greater depth, a potential buyer can determine if the company has a strong financial foundation and is in good legal standing.
Generally, this process starts with the buyer requesting access to a substantial volume of company records. Once the seller receives that list, they are responsible for preparing the documents and information in a digestible format for the buyer.
After the information is received, the buyer will take time to review the data and prepare follow-up requests for additional documents. The buyer may then highlight causes for concern or new points of negotiation once the review is complete.
It’s important to note that each step in the due diligence process can take weeks. Each discrepancy identified by the buyer will extend that timeline and increase the pressure on your team to deliver accurate records.
The more prepared your organization is to answer these questions, the less likely that the due diligence process will cause delays in the acquisition. Here’s a quick review of the types of documents your organization might be asked to present during due diligence.
Common Requests during the Due Diligence Process
While some requests during the due diligence process will be industry-specific, the large majority of information that sellers will need to supply falls into three broad categories:
- Financial Records
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- Balance Sheets
- Income Statements
- Cash Flow Statements
- Earning Projections and Financial Forecasts
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- Legal Records
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- Property Records
- Outstanding Contracts
- Stockholder Agreements
- Company Bylaws
- Proof of Compliance
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- Operational Records
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- Business Processes
- Inventory Management
- Supply Chain Overview
- Employment Records
- Human Resources Policies
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The due diligence process demands businesses invest significant time and resources to prepare this documentation. However, much of that work can be completed before the acquisition process is initiated.
5 Ways to Limit Delays in the Due Diligence Process
As nationwide momentum for mergers and acquisitions continues to languish following a slowdown in 2022, businesses preparing for a sale must take full advantage of the exit opportunities at hand. That’s why the following strategies to prepare for a smooth due diligence process are so vital.
1. Clean Up Financial Records
Financial records must tell a compelling story about your company’s performance to appeal to investors. As a result, some fine-tuning is necessary before your organization can hand over financial records to a potential buyer.
Income Statements and Balance sheets and other relevant financial documents must be reviewed thoroughly to ensure they are free of errors and inconsistencies. These records must also capture one-time expenses and comply with all accounting standards relevant to your industry.
Address any issues head-on: it’s much more preferable to deal with them proactively than wait for them to rear their head during the due diligence process. In some cases, the support of an outsourced CFO can help prepare your company for a successful sale.
2. Prepare for a Financial Statement Audit or A Quality of Earnings Review of Your Business
Don’t be surprised if potential buyers decide to employ outside professionals as part of the due diligence process. These financial experts perform an audit or Quality of Earnings to verify the accuracy of your financial records. They may also be asked to evaluate your company’s operations to ensure they are sustainable in the long term.
During this time, you can expect to receive all kinds of inquiries and questions from these professionals. To respond as quickly and accurately as possible, businesses can rely on an experienced advisor like the team at G-Squared Partners. Our professionals can interface with the acquirer’s due diligence team on your behalf and own the role of answering their queries.
3. Develop a Business Forecast
A company acquisition is more appealing if there is evidence that the business will be successful in the future as well as the present. Sellers can make that evidence readily available to buyers in the form of a detailed financial forecast.
Business forecasts should include advanced models that project future revenues, cash flow, liabilities, and operating expenses. They should also incorporate relevant industry data and economic trends to support those projections.
4. Establish a Data Room
A single reliable repository of information is important in streamlining the due diligence process. This approach prevents the ongoing communications between buyer and seller from being overwhelmed with requests for records and responses.
Building a data room will require the seller to gather, organize, and digitize all important business data and documentation. The scope of the information collected for the data room may range from standard financial documents to information as specific as boardroom meeting minutes. Use a professional data room solution rather than trying to build your own data room from scratch: this will make the process far easier for everyone involved.
5. Evaluate Compliance
A meticulous review of compliance issues helps sellers discover issues that could bring a deal to a halt long before they enter the due diligence phase. As with any other issues addressed during the exit planning stage, confronting this head-on and resolving any issues before due diligence begins is key to a smooth transaction.
Tax liabilities are among the most widespread liabilities that are uncovered during compliance review. For example, a company may have neglected to file appropriate state income or sales tax returns if they were unfamiliar with the economic nexus requirements of that state. If these issues were discovered during the due diligence process, it could affect the valuation of the business.
Prepare for a Smooth Due Diligence Process with G-Squared Partners’ Exit Planning Consultants
There’s nothing simple about selling a business. Thankfully, your company has the option of tackling this challenge with the support of professional experts.
Thanks to a proven background advising companies on both sides of the table through M&A transactions, G-Squared Partners can help your organization resolve due diligence issues long before they are discovered by a potential buyer.
Contact G-Squared Partners to learn more about how we can help prepare your business for a smooth due diligence process.
