An appealing offer with a high purchase price has just been received for your small/mid-sized business! This is exciting, however it’s not time just yet to sail off into the sunset.
The prospective buyer of your business must now perform their due diligence. Due diligence is a specified period, generally anywhere between 30-90 days, in which the buyer will perform a comprehensive review and analysis of your business. This is performed to ensure validity of all facts and financials shared thus far, so that the acquirer feels confident in their purchase decision. DD also enables the prospective buyer to better understand what actions need to be addressed and accounted for during the ownership transition process.
Each buyer will have their own respective due diligence process and requirements. Generally we observe the following due diligence categories along with requests for information/documentation in regards to the following items:
- Financial
- Tax Returns, Financial Statements
- Monthly P&L/Balance Sheets (Excel preferred)
- Bank Statements
- General Ledgers
- Adjustments/Add-Backs
- Revenue/Margin breakdown by product/service and customer
- Accounts Receivable and Accounts Payable Aging Information
- Vendor Purchase information
- Projections/Forecasts (if available)
- Operational
- Fixed Asset/Equipment Information (including CapEx schedules)
- Detailed Employee Information (org charts, payroll, benefits etc.)
- Inventory turnover information
- Technology and Systems utilized
- Standard Operating Procedure documentation
- SWOT Analysis along with General Overview of Business
- Legal
- Contracts (customers, suppliers, outsourced services, etc.)
- Licenses, Permits, Regulations that the business requires
- Property/Lease Agreement
- Insurance Policies
- Employee Benefit Programs
- Environmental Assessments
- Pending litigation/claims/liens
- Legal Entity documentation
While the thought of collating the information on this “high-level” list itself may seem daunting and even invasive, it is necessary in order to ensure that the buyer will follow through with the offer they have made to purchase your business. If you were spending a substantial amount of capital or taking on debt, you would want to perform a thorough due diligence as well to feel satisfied and confident heading into your new venture!
It is crucial to have alignment with your deal team, as your legal counsel, CPA and business broker will likely help gather and organize a lot of this information. For larger transactions, many buyers will have a Quality of Earnings performed by a 3rd party accounting firm, at their own expense. This provides further confidence that your business will be a financially sound investment decision for the buyer. A lot of the information gathered in Due Diligence or a Quality of Earnings Report will also be extremely valuable inputs for a lender, assuming a bank loan is financing a portion of the transaction.
Our job at NJ Broker Plus as your business broker is to quarterback the due diligence process. We will help collect, organize and analyze the information provided to ensure that the deal is on the right track towards a successful closing. Getting through the due diligence process and purchase agreement negotiations can be a roller coaster at times, but our firm is here to support you as the seller and guide you with our expertise.
- Due Diligence Expectations When Selling Your Business - October 18, 2024
- What is FF&E and what role does it play in a business transaction? - September 20, 2024
- How to Prepare Your Business For Sale - September 4, 2024
