Selling a business is a complex endeavor that requires a lot of paperwork. What’s more, once all the marketing materials are created, the financials are in order, and a prospective acquirer has signed a Letter of Intent, parties must go through the process of due diligence. All the information presented by you, the seller, must be vetted by the prospective acquirer prior to completing the purchase.
On average this process takes anywhere from 30 to 60 days to complete – that’s 30 to 60 days in addition to the time it takes to engage an intermediary, create offering materials, and shop the deal with the most qualified buyers. Needless to say, it is in your best interests to have the necessary documentation organized and easily accessible to expedite due diligence and move forward with the deal in a timely manner.
To that end, we’ve outlined the entire process from start to finish so you know what to expect and how best to prepare.
The first step in the due diligence process is conducting a thorough review of current and historical financials is often. Supporting documents should include tax returns, audit letters, P&L statements, bank statements, credit card statements, supplier invoices, and general ledgers for three years prior or the life of the business (if less than three years old).
Prospective acquirers want to verify that the sales and revenue data reflected in the offering materials is both accurate and up to date. The financials should be presented clearly in the offering materials and the supporting documentation should be readily available so the prospective acquirer can complete their own independent review of the data. This also provides an opportunity for you and an intermediary to address any questions concerning the company’s performance with comprehensive financial analysis.
A prospective acquirer will want to verify and examine any tangible assets included in the transaction, including stock on hand, equipment, fleet vehicles, and facilities / real estate. Prior to inspection and appraisal, ensure that all maintenance items are up to date and that all resources are organized. Failure to do so will adversely affect the terms of the deal. For example, if inventory is damaged, out of date, or stale it is rendered unsellable. A prospective acquirer will demand a reduction in purchase price to offset the cost of lost merchandise.
Intangible assets such as intellectual property, patents, and web domains will also be verified. You will need to provide appropriate documentation of trademarks, copyrights, filed patents, and registration of any URLs related to the company’s websites for examination.
Licensing and Compliance
All relevant permits, licenses, and other legal documents must be reviewed and verified prior to a sale. This includes formation documents, annual filings, industry-specific certifications, business licenses, other permits, and contracts. A prospective acquirer will retain an attorney to confirm that the company is in compliance with applicate laws and that any current permits and licenses are transferable.
An acquirer will also ask for proof of ownership for any tangible and intangible assets, including deeds, titles, and intellectual property. Finally, you must demonstrate that you are authorized to seek a sale of the business by confirming that you own the business or otherwise have the support of the company’s stakeholders.
Suppliers and Vendors
You must disclose any contractual arrangement between the company and its suppliers / vendors. A prospective acquirer wants to ascertain if there are special terms, what the supplier’s capacity is, and if there are any inherent risks in transferring ownership to a new party. For instance, an acquirer should know in advance if they will not enjoy the same rate as the current owner.
Some acquirers want to speak with the supplier prior to closing the transaction. For many sellers, this is a dealbreaker. Consider whether you are comfortable with your suppliers knowing about the sale and inform your intermediary of your decision prior to beginning the due diligence process.
It’s important that an acquirer understands the company’s human resources and how they are managed. They must verify that all paperwork is up to date and that the company is in compliance with applicable labor laws. Employee biographies will satisfy the former, while documentation of hiring practices, payroll reports, etc. will prove the latter.
If you do not have employee bios, consider drafting a write-up of key personnel that can be shared with prospective acquirers looking to develop a better understanding of the company. As with all other stages of due diligence, make sure that all documentation is up to date and organized.
A prospective acquirer under Letter of Intent likely already believes in the growth potential of the business to a certain degree. However, they will still want to weigh the acquisition cost against the payoff. The offering materials can highlight growth opportunities but supporting documentation should lead them to the conclusion that those avenues are worth pursuing.
This documentation can range from market studies outlining the Return on Investment for a specific strategy to a product roadmap the company’s new owner can follow to expand the existing catalogue of goods. The key is to give the prospective acquirer enough information to conclude that the potential payout will be well worth the investment.
To Close or Not to Close
Parties will continuously negotiate deal terms throughout the process. A smooth, successful due diligence period will result in the optimal outcome, while any bumps in the road will result in renegotiation, delay, or even termination of the transaction. In Part 2 of this series, we will discuss the ways in which a professional Mergers and Acquisitions advisor can help ensure a successful due diligence period and sell your business for the maximum value.
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