23 December 2024: Selling a Business:

The Invasiveness of Due Diligence

“Are you – and your business – ready for a buyer’s due diligence?”

That is a question we pose to potential clients in our initial meeting about selling a business. We do so because most business owners – and most businesses – aren’t.

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WHAT WE’RE LOOKING FOR: Business and IT services (B2B) and the trades (HVAC, landscaping, plumbing, roofing, etc). EBITDA: $2M – $8M. U.S.–based             

in**@Wo**********************.com

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Any even a moderately savvy buyer will perform due diligence on a company before acquiring it. The only question is how thorough – how “invasive” – the process will be.

When selling a business, owners must be aware that the buyer will be probing every nook and cranny – every conceivable aspect – of the business and that any “iffy” issues that an owner might consider mundane could very well loom large to a buyer. Our selling clients must know early on that everything – the good, the bad and the ugly – is likely to come to light. This means tons of questions that the seller and broker must be prepared to answer.

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Are you a business owner? A Realtor? A business broker? Are you looking for a business to buy? Do you have questions about the selling or buying process, the valuation, marketing the business, deal structure, financing or some other business issue?

You can find the answers in The Brokers Roundtable℠. Join seasoned business brokers, commercial real estate experts, valuation specialists, financing professionals, attorneys, accountants and all the other talent associated with what we do.

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Do It Yourself?

We encourage our selling clients to perform their own due diligence as if they were the buyer – as if they were about to write that big acquisition check. Looking at the situation through the buyer’s eyes helps the seller anticipate some of the buyer’s questions and potential objections, and then prepare convincing answers for them.

From the buyer’s perspective, the goal is to arrive at a level of comfort that confirms the reasons for their original decision to make the offer to purchase. Such confirmation comes only with a thorough understanding of the business’ condition and operations, a sentiment the buyer must achieve to confirm that the acquisition continues to makes sense.

Generally speaking, even in the best of circumstances buyers are skeptical. After all, even in the smallest deals, a “mom and pop” buyer is about to put the family fisc on the line. In larger deals – in which the buyers might be small private equity groups or family offices – the management of such buyers have a fiduciary responsibility to their investors.  The dive they do to confirm the information they’re getting and know as much as humanly possible about the business they’re targeting is deep, indeed.

Once the parties have agreed to the outline of the transaction – that is, a letter of intent or purchase agreement, which should include the conditions and parameters of due diligence, has been signed  – the buyer will submit a request for the initial round of documentation he or she will want to examine. This list will be broad and deep – and in all likelihood, only the first of several.

Why several? Because most of the initial tranche of documents provided will raise additional questions and need clarification. This is where the tedium can begin.

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Courses! Courses! Courses!

Many of you have asked if our Flagship Course, “Learn How to Value and SUCCESSFULLY Sell Businesses“, could be made available on a module-by-module basis. We’re happy to report that this is now possible.

We’ve broken our Flagship into six separate modules (or module groups) to give you all the flexibility you need to learn only what you want to learn – and we’ve moved them all over to the new Brokers Academy in The Brokers Roundtable℠ . The Flagship is still available but the modules are now available individually.

You don’t need to be a Member of The Brokers Roundtable℠ to access any of these courses but if you are, you’ll receive a 20% discount on the cost of any course you enroll in. If you’re not yet a member of The Brokers Roundtable℠, you can learn more – and get access to all the talent and resources – here. 

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What to Expect

When selling a business, there are any number of things that need to be addressed during the due diligence period. Here are a few of them.

• Financials. Needless to say, a buyer wants to confirm the revenue and expense numbers, the expense categories, the business’ hard assets, the cash flow and the “true” net earnings (discretionary [or adjusted net] earnings). This requires a close examination of the profit and loss statements, tax returns, the business’ balance sheet, leases (especially real estate leases for ongoing rent increases), etc.
• Inventory. Does the actual inventory match the inventory claimed by the sellers? What amount of the claimed inventory is obsolete? Does any need to be written down or off?
• Corporate Status. Is the company current and compliant with all governmental requirements? Is it “in good standing” with its state’s or provinces’ corporation commission?
• Corporate Structure. Who has the authority to sign transaction documents? If there are multiple owners, has there been a corporate resolution to sell the company?
• Management. Who makes up the management team? What is the management structure? This is particularly important if retention of some or all of the management team is part of the deal.

• Employees. A roster of employees, their titles or positions, their salaries or wage rates, their tenure and, if applicable, their certifications and qualifications.
• Tax Payments. Is the company current on its tax payments, particularly withholding tax? Payroll and wage taxes that are not current at the time the business is transferred will often come back to bite the buyer and most buyers are aware of this potential liability.
• Contracts and Leases. Supply contracts, sales contracts, equipment leases, real estate leases; each must be examined, particularly for any changes in terms or financial impacts that may be triggered by a sale of the business, known as “change of control” clauses.
• Work in Progress. A buyer will want to verify the status of all work in progress. Such work would include the percentage of a service contract that has been completed. For example, if the target company is providing HR services under contract, how much of that contract has been completed and how much paid for? In another example, if the target company is providing laser sights for the military as part of a three-year, one million unit contract, how much of that product has been delivered, how much accepted and how much paid for? In still another example, if the company manufactures widgets from components bought from various outside suppliers and keeps a widget inventory ready to fill orders, how much of its production is complete (see Inventory, above) and how much is only partially complete?
• Debt. An astute buyer will confirm what is claimed by calling the lenders and creditors. But they will also have a UCC search done to make sure nothing is filed that even the sellers don’t know about.

The Bottom Line

If a professional business broker or M&A advisor, has been engaged to find a buyer, that professional knows what’s needed and in all likelihood the information a buyer will need to conduct the due diligence of the business has already been gathered and put into a clear, understandable format meant for buyers. In our network, we call this the Offering Memorandum though others sometimes refer to similar documents as a Confidential Information Memorandum (CIM) or “book on the business”.

As a rule, when selling a business the Offering Memorandum includes the pertinent data described above as well as photos, location maps and pretty much any information a serious buyer would need in order to make a decision. Our goal with the Offering Memorandum is to provide the potential buyer with all the information it needs to make a decision pending only a site visit to inspect the facilities and hard assets, and to confirm the data we and the seller provided.

This process can seem extremely invasive – even unreasonable – to a seller. We want the seller to put themself in the buyer’s shoes and ask the following question: “If I were about in invest X million (or hundred thousand) dollars in a business, how thoroughly would I investigate?” This usually mitigates the complaining. (As we’ve often stated, “selling a business ain’t for sissies.”)

Professional business brokers, especially those who have earned the prestigious Certified Business Intermediary (“CBI”) designation, understand what a buyer needs in order to perform proper due diligence in anticipation of acquiring a business.

I’d like to hear from you. What topics would you like me to cover? How can we tailor these posts to be more useful to you and your business. Let me know in the comments box, below, or email me at

jo*@Wo*******************.com











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If you have any questions or comments on this topic – or any topic related to business – I’d like to hear from you. Put them in the comments box below. Start the conversation and I’ll get back to you with answers or my own comments. If I get enough on one topic, I’ll address them in a future post or podcast.

I’ll be back with you again next Monday. In the meantime, I hope you have a safe and profitable week.

Joe

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NOTE TO READERS: Our “Searching For…” feature has been moved to our online community, The Brokers Roundtable℠. It will appear there exclusively.

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#business #businessacquisition #sellabusiness #becomeabusinessbroker #businessbrokering #businessvaluation #MergersandAcquisitions #buyabusiness #sellabusiness #realtor #realestateagents

 

The author is the founder, in 2001, of Worldwide Business Brokers and holds a certification from the International Business Brokers Association (IBBA) as a Certified Business Intermediary (CBI) of which there are fewer than 600 in the world. He can be reached at

jo*@Wo*******************.com