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Part Two: The Dating Process (Due Diligence)

When your business starts collecting interested buyers, it can be an exciting time. However, don’t let those emotions cloud the real intentions of the parties interested in your company. If a potential buyer is serious about your business, you can expect them to begin asking questions and requesting information. This process is often referred to as due diligence.

Unless you’ve been through the process before, you might be unclear about what due diligence really means. At the most basic level, due diligence is a process of preparation that reviews every detail of your company, identifies flaws and opportunities, justifies your selling price and removes the risk of acquisition for the buyer.

The buyer basically wants to know what exactly they are inheriting if they purchase your business — both good and bad.

What To Expect

Knowing what due diligence looks like and being prepared for this process will help make it go quicker and smoother for all parties involved.

Assemble Your Advisor Team

You’ll need an attorney, CPA, financial advisor and possibly a banker. These professionals will be able to help you make sure that your company is accurately valued and give you the technical information you need to decide if your buyer’s offer is a good one or not. A business coach is also a great idea to help build your team ahead of time!

Know Your Buyer

Who is it that is trying to purchase your business? This information matters and affects how you behave and react to the buyer’s requests. Just as the buyer is trying to get information on your business, you should absolutely be researching and learning as much as you can about the buyer. This could reveal details about their intent with your company as well as their level of commitment to buying your business. Here are some questions about the buyer that you should find the answers to:

  • Is a broker or investment banker involved?
  • Where are the dollars coming from or what’s the source of financing?
    • Private equity
    • Bank loan
    • Cash
  • Are they a competitor?

Letter of Intent

The buyer will provide you with a letter of intent — or a preliminary commitment of one party to do business with another. The letter of intent is a non-binding agreement. Both parties can write out initial points of discussion or potential plans without explicitly agreeing to anything. This letter will be the first declaration of the chief terms of the purchase and the points to be negotiated.

The letter of intent can include an NDA (or non-disclosure), which can have serious effects on you after you sell the business. It’s important to be aware of any NDA sections as they can severely limit your income and growth post-sale. This is critical to agree with or get advice on before you proceed to provide the potential buyers with sensitive information.

Sharing Information

Once you are comfortable with the buyer you are negotiating with, you’ll have to start providing information about your business for them to consider. This process can sometimes feel invasive when you realize how much integral information the buyer needs to know about your company. However, this is a normal process. Below are some of the common pieces of information you’ll need to provide.

  • Organizational information
    • Corporate documents/partnership agreements
    • State/Federal
  • Financial records
  • Tax filings
  • Customer information
    • Revenue/Profit
    • Contracts
  • Legal/regulatory
  • Team breakdown
  • IP

If a potential buyer is not requesting this level of detail, you might question how serious they really are about acquiring your business. Are they just kicking the tires? If they are a competitor, are they just trying to gain access to your company’s information? Keep a watchful eye during this process to ensure you feel comfortable and confident in the proceedings. This is also a great time to consult often with your team of advisors.

Agreement Achieved

If the information-sharing process goes smoothly, then you’ll likely feel confident in the buyer’s intentions. In the next blog of the series, we’ll navigate the negotiating process and explain some tips on making a successful sale agreement that benefits you.