The due diligence process is a basic procedure in a business operation or purchase transaction. It occurs when a company evaluates the advisability of carrying out a merger or acquisition, or when an entrepreneur is considering selling their business.
It involves checking risks and compliance, conducting an audit to verify facts and information on a particular subject, and determining the state of the company. A large amount of information and documentation is requested. Notably, it is the most sensitive part of the process as it consists of checking all the documentation and information previously delivered.
From a seller’s perspective, due diligence requires a great deal of preparation, mainly in correcting possible irregularities in management and presenting all the documentation correctly to the buyer.
We can help you understand the necessary strategies to employ during this process.
- The importance and necessity of due diligence
- Organising all relevant information
- Seeking professional advice
- Relationship management
- Controlling the process
The importance and necessity of due diligence in the company sale and purchase process
Due diligence is essential for the closing of the transaction, both from the buyer’s and the seller’s point of view. It is an important step in the process of selling your company whereby the buyer examines and audits the business in order to decide whether to make the purchase.
Due diligence can be commissioned by either party, but when it is commissioned by the seller itself, it is called “vendor due diligence”.
Sellers themselves may be interested in speeding up the sales process and by carrying out due diligence, they save time and effort for potential buyers.
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Organising all relevant information
For the seller, due diligence can be a taxing process. As a result, we advise business owners to compile and organise all relevant information about their company, including financial statements, contracts, employee data and legal documents. For the benefit of potential buyers, this information should be presented in a clear and succinct manner.
Creating a data room or virtual platform, which is a safe repository for the distribution and archiving of documents, can help ensure that the information is accurate, current, and organised in a way that is easy to navigate. This further enables the business owner to maintain a degree of confidentiality throughout the process. The seller can increase the likelihood of a successful sale by providing the information in this way, thus fostering a healthy rapport with the buyer.
Therefore, buyers are more likely to invest their time in a motivated and well-prepared vendor, as it instils confidence in their decision-making process.
Seeking professional advice
Using third-party service providers costs money, but it can offer a variety of benefits. To improve the effectiveness of the due diligence process, it is advised to engage with M&A specialists, such as financial and legal experts.
Typically, the buyer will seek an evaluation of the financial condition of your company, including its cash flow, revenue trends, assets and liabilities and tax records. In order to evaluate further your company’s financial health and establish its value, they may also ask you about any liabilities and outstanding debts, as well as your financial projections.
These experts will guide you on what information to provide to prospective buyers and how to present it.
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The due diligence process requires excellent relationship management of two distinct areas: the buyer, and advisor networks.
When it comes to selling your company, we urge business owners to put themselves in the buyer’s shoes and anticipate the types of queries they might have. Concerns about the company’s financial performance, market trends, rivalry, customer connections, and other factors that might affect the can be included in this.
Likewise, as mentioned above, seeking professional advice is necessary if you wish to sell your business. We encourage the seller to build a rapport with the advisors and rely on their expertise to guide them through the process.
Misinformation is a common occurrence during the due diligence process. Thus, sellers should be as open and transparent about the strengths and weaknesses of their business, disclosing any potential risks or liabilities, in order to build confidence among potential buyers.
During this due diligence process, you may feel uncomfortable with the meticulous questions involved. But remember that it is essential to communicate frequently and transparently with the buyer, addressing their concerns.
Being patient and transparent will reinforce your image and that of the company to the buyer. This will be reflected in the price you get and will facilitate the deal in the subsequent negotiation, ensuring a successful sale.
Controlling the process
Moving with a sense of urgency is crucial for all stages of due diligence however this is distinct from rushing.
Sellers should control the due diligence process by setting clear deadlines and goals, allowing them to identify aspects of their business which need further attention or clarification. This will further allow them to leverage their advisors, networks and their own skill set to gather the information required.
It’s important to keep in mind that the deal requires the consent of both parties every step of the way and a buyer could terminate the process if they feel time is slipping.
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