Here we cover the benefits of preparing vendor due diligence prior to putting your business on the market versus the requirement for satisfactory completion of due diligence after a prospective buyer has made a conditional offer on your business. We’ll also look at important points to consider in the due diligence process. 

What to expect in Due Diligence 

Due Diligence involves making your business documents available at the request of the purchasers’ advisors (usually their accountant and lawyer). You will normally upload this information to a “data room”, which is typically a secured website that acts as the central repository for all parties involved in the transaction. 

The purpose of due diligence is to validate the information provided, analyse the financial strengths and weaknesses of the business, and identify areas of potential risk. 

Completion is typically required with a specified timeframe and the process can be very time-consuming, resulting in resources being diverted away from running your business. The timeliness and depth of your responses to information requests from the purchaser will help develop trust. However, if you are not prepared for the process and your responses are delayed, this can cause friction with the purchaser and their advisors. 

 Vendor Due Diligence – how to prepare 

The process of vendor due diligence can assist you in preparing your business for sale. When a property is being prepared for sale, a vendor might paint, recarpet and stage their home, but it is less common for sellers to apply the same mindset when selling their business. 

It is ideal to start the preparation process before you list the business for sale. Below we have outlined some key areas to focus on when preparing your business for sale. 

Business documents 

Pull together all the important “paperwork” for your business. This includes everything from financial and legal documents through to any other documents required by the Companies Act. Make sure that they have been signed by all parties! If they haven’t, request signed copies or arrange for them to be signed. Where contracts have been superseded or amended, make sure that they are all on file and signed. 

Customer and vendor contracts: You may have arrangements that are not documented or business that has been conducted under a “mutual understanding”. To a purchaser this represents a risk, perhaps even a significant risk. It is worthwhile formalising these arrangements so that the purchaser can perform their financial analysis with a degree of certainty. It is also worth checking that your insurance is up to date, as inadequate insurance cover is another risk that a purchaser can use to negotiate price. 

Have all the documents easily assessable and review them in advance. 

Financial records 

The first part of any financial due diligence exercise is to get comfort over the “quality of information” or in other words, a high-level review of the accuracy of the financial records held by the business. 

Ensure that reports from your accounting system match your signed financial statements and tax returns. It’s prudent to engage with your accountant to ensure that you understand what numbers they have used to compile your financial statements and tax returns, including adjusting entries they have posted. 

Perform a thorough review of your balance sheet. Are there old debtors or obsolete stock that ought to be written off? This is a good opportunity to clean up your balance sheet and it demonstrates that you proactively review your financial position. 

Staff records 

Although staff documentation forms part of the business records, the area is so significant that it warrants separate mention. Ensure that all employment contracts and contract amendments are signed by both parties. If you are selling shares in your business, then your calculation of annual leave entitlements will be an area of focus for the buyer. If you have staff who work variable hours, an external review of your annual leave calculations can highlight potential issues to be rectified. 

With vendor due diligence ahead of a business sale you have the luxury of time, which you do not have once a potential buyer is conducting financial due diligence on your business. 

This exercise is about “getting your house in order” and the context does not need to be linked to selling the business. Therefore, it could be appropriate to allocate certain tasks to staff as necessary. 

If you would like to learn more about vendor due diligence and its potential to get the best price for your business scroll down for our corporate advisory specialists.