If you want to sell your company, you’ll want to make sure that the due diligence process is done properly.

This can be a complex and time-consuming process that should be started as early as possible before an actual sale takes place.

Read on to learn more about why due diligence is such an essential component of a successful business sale.

About Due Diligence

The term “due diligence” generally refers to making sure that the necessary steps are taken for legal and financial compliance.

When you are getting ready to sell your company, this process acts as a kind of appraisal or evaluation of your business.

The buyer will essentially be looking for “red flags” as they review:

  • Financial and accounting records
  • Product information
  • Business and marketing activities
  • Property information
  • Contracts
  • Regulatory documents
  • Organizational documents
  • Employment information
  • Intellectual property

The buyer will be looking for problems or issues which could cost them legally and financially down the line, so the seller needs to make sure their bases are covered.

The buyer will also be investigating all areas to decide whether or not they believe the price is reasonable, and how much to negotiate during the sale.

A business lawyer can guide you through this process, and undertake specific evaluations such as risk assessments where needed.

Before you sell your company (or buy an existing business), get familiar with some key aspects of due diligence as discussed below.

Legal

Your lawyer can help you understand, assess, and solidify legal paperwork such as:

  • Licenses
  • Contracts
  • Litigation processes
  • Reports
  • Business plans
  • Compliance
  • Regulations

While all of these elements are important to review, contracts are a key item to detail since they define your relationships with third parties.

You may want to, for instance, consider including an assignability clause on your contracts which makes them transferable without the other parties’ permission.

On the flip side, make sure that there is no “right to refuse a contract transfer” or similar clauses in your contracts.

Financial

Before you sell your company, you will need to ensure that all financial records are in place, clear and accurate.

Your accountant should be on top of this and have clear records on hand, detailing important numbers like:

  • Income
  • Revenue
  • Employment deductions
  • Debts
  • Leases
  • Depreciation
  • Equity

These numbers are essential for establishing an accurate price and serve as an important communication tool to the buyer as they investigate your valuation process.

If you get your accountant to do a complete audit early in the evaluation process, the selling transaction will be much smoother.

Company Reputation and Culture

Evaluating customer and employee relationships isn’t nearly as cut and dry as is reviewing legal or financial information, especially if you want to keep the fact that you’re selling under wraps.

Understanding how customers and employees view the company is as simple as looking at review sites like Yelp and Glassdoor.

Marketing research will come in handy to give to the prospective buyer as it will help them forecast revenue levels after you sell your company. Hire a third party to do this if you need to keep the sale confidential.

Depending on the nature of your business, just keep in mind that the reputation factor is more at play with related information being readily available online and as such may play a substantial role in the buyer’s decision-making journey and negotiation process.

Product Information

If inventory makes up a considerable portion of your business value, you may want to investigate it as a separate component rather than just leaving it as a single accounting line.

Here you can establish the relative value of your product as the maker stands and in the forecast, how your current inventory will sell, and if there are inconsistencies like slow-moving or marked down items that need to be addressed.

Before you sell your company it’s a good idea to get rid of any inventory items which may actually or be perceived as lowering the company value.

Hire A Business Lawyer

Whether you’re buying or selling a business, you’ll want a qualified business lawyer on your side from the start.

A legal expert will spearhead the due diligence process, coordinate with other experts, make sure you are in compliance, manage complex paperwork, and generally make the selling process as painless as possible.

Most importantly, they can help you get the best price for your business.

For more information, call 303-780-7333 or schedule an appointment.

Did you enjoy this article? Here are three more you might like:

How to Structure Payments in a Business Purchase
Why Do Businesses Close?
How to Finance Your Business During Difficult times