Selling your business could be the most significant financial event in your life. It's on par with buying your first home. And like the banks, who give you your first mortgage, a prospective buyer is going to scrutinise every aspect of your company’s financial stability.

As a seller, you need to be prepared. Conducting a sell-side due diligence, before your acquirer starts their deep dive into your business, is the solution. 

The stakes are incredibly high for a business sale, a successful settlement could see a handsome payout. Getting to that point, however, can be a complex and tiring journey. One that even the most experienced business owners may find challenging.

To receive the best possible outcome when selling your business, it depends on timing, markets and your negotiation skills. A key factor in achieving the outcome you want is staying one step ahead throughout the business sale process. This is where the importance of sell-side due diligence comes into play. 

Conducting an internal due-diligence allows you to look at your business through the eyes of an acquirer. When you drill down to that level you will identify potential concerns a buyer may have, or possibly discover untapped opportunities, which can help you position your business better to an acquirer.

There is no doubt that a sell-side due-diligence should always be part of an established process for getting exit ready. 

Stay one step ahead to ensure a favourable transaction

Anticipating a buyer’s concerns

During a buyer’s due diligence process, they will analyse fine details. Business operations, customer and staff retention, and projections will all be under the microscope. If you are not well-equipped to provide credible answers, it could jeopardise the sale.  

Items most frequently under scrutiny include:

• Sales analysis and product trends
• Key vendor relationships
• Cash flow: Both historical and projected
• Seasonal effects on income and working capital
• Contractual commitments and their potential impact

While you may anticipate many of the questions a buyer may ask, undertaking a sell-side due diligence prior to this examination period will ensure you’re prepared. It will give you time to develop your answers and have gathered all the relevant documents needed to combat any objections which arise. 

This will put any issues to rest, as well as build trust with a buyer. If you look like you’re withholding information or skirting around sensitive subjects, buyers will translate this as risk, which will negatively impact their purchase offer, or worse, it will scare the buyer off. In the end, everything comes out in a formal due diligence process. By providing accurate data and analysis, your transparency will pay off.

Give yourself the best leverage for negotiations

By preparing sell-side due diligence documents early on in the process, you’ll have access to in-depth information which can be shared with interested parties before any official bidding has begun. This may cut down on the amount of time and money the buyer may dedicate to their due diligence check, creating a positive partnership early on as well as giving you the upper hand. 

These potential buyers will feel confident in submitting their bids, potentially creating a competitive landscape and will help you receive the maximum value for your business.

Preparing business financials 

When selling your business, you always need to put yourself in the shoes of the buyer. What information would they deem most relevant during negotiations and how can you prepare those documents accordingly so you can steer the direction in your favour?

A buyer will likely ask to see the financial data including monthly results, internal numbers and all financial statements from recent years to present. It’s imperative these internal numbers are accurately reflected in the statements provided to the buyer. 

To avoid unwanted surprises, make sure your business has a structured financial system which follows industry best practice. This is in order to collect and retain fiscal data needed to present the overall financial image of the business and prove its sustainability over time. 

Make sure you set aside time to become familiar with these documents as you should be able to explain the markets and factors which contributed to the reported results. Again, this transparency with the buyer will build trust and allow the buyer to understand the anomalies or abnormal occurrences in your business’ earning patterns. 

Normalising the numbers

Many sellers put off normalising the business numbers until far into the sales process. Whether it’s due to resource allocation, time constraints or ignorance, this delay puts you at a steep disadvantage. 

Normalising numbers is the adjustments required to reflect what the buyer is actually purchasing. The seller will isolate the operational performance of the business, taking out additional costs such as personal expenses, financing costs, and wage adjustments to market rates.

By presenting this adjusted cash flow, it will help a seller avoid confusion around what the buyer is actually acquiring, and usually has a positive impact on the valuation.

As a business owner, you should be aware that this transaction process will place additional pressure on management and accounting team members. It’s imperative to start off with great time management, set aside internal planning days and be sure to check in on the well being of your staff throughout the exchange. There may also be issues around privacy as you may not want to tell the whole team about the process you are undertaking. But the earlier you begin the process, the more prepared you will be, and the healthier your business can continue to operate day-to-day despite the additional demands.

Be prepared to seek external help

Even following the above recommendations, you may find yourself feeling overwhelmed and under prepared. Enlisting the help of a qualified sell-side due diligence adviser sets you up for success throughout the transaction. This adviser will take the stress off your team by providing a clear process, and helping you gather the information you need, allowing you to stay focused on the normal daily operations.

A dedicated team is the most effective if brought on from the beginning as it allows time to analyse the data, pinpoint issues and normalise the numbers well before a buyer and their advisers can get involved. Your team will work with you from the outset, preparing documents and presenting the findings to avoid any unnecessary backpedalling once the gruelling sale process has begun.

While there are costs associated in running a sell-side due diligence or bringing on an adviser, a good sell-side adviser will add much more value than the fee they charge. This value is capitalised in real dollars when the business is sold, but it will also save you a lot of time and stress by running a smooth process.

Are you thinking of selling your business? Learn more about Exit Advisory’s business sale process. Our experts will help mitigate potential risks and help navigate through the challenges of the sales period.