Any serious buyer will most likely scrutinize your financial statements, operations, assets, and legal agreements. This is something you need to be aware of if you are considering selling your business. To improve the buyer review process and ease deal negotiations, do your presale due diligence before beginning any conversations with buyers. You’ll have the opportunity to address any possible legal or financial issues before your business goes on the market if you work with professional financial and legal advisors.
Anticipate Buyer Scrutiny
The primary goal of presale due diligence is to evaluate the quality and sustainability of earnings, identify risks, and normalize financial results before giving prospective buyers access to the company’s books. Financial advisors look for anything that could be considered negative or inconsistent by a prospective buyer and, thus, potentially cause the buyer to reduce the offering price — or even terminate the deal.
Presale due diligence generally focuses on financial performance, tax exposure, and other matters that buyers might scrutinize. So, your financial advisor may:
- Analyze the last three years of financial statements to assess revenue recognition policies, margin trends, and earnings before interest, taxes, depreciation, and amortization
- Evaluate inventory accounting methods, costing practices, and obsolescence risks
- Look for any “off-balance-sheet” liabilities
- Assess compliance with federal and state regulations, such as those related to environmental protection and employee-related taxes
- Review customer and vendor concentrations, related-party transactions, and key contracts,
- Evaluate the strength of confidentiality and nondisclosure agreements, and internal control policies
- Identify any outstanding lawsuits
Addressing these issues now can reduce seller and buyer uncertainty later.
Evaluating IP Issues
Presale due diligence also may require your attorney to assess ownership of key intellectual property (IP) such as patents, trademarks, logos, and proprietary software. And your financial advisor may review IP documentation to identify gaps or inconsistencies that could affect asset values.
Such verification is critical to a company’s value, especially in industries such as technology, pharmaceuticals, and manufacturing. If, say, your business has only a tenuous claim on an internally developed product, it’s better to learn — and possibly fix — this before a prospective buyer finds out.
Start Early
The earlier you start planning and preparing for a sale, the better. Ideally, you should engage a professional with merger and acquisition experience to perform presale due diligence on your business at least six months before going to market. If you’d like to make major changes before selling, such as divesting noncore operations or significantly reducing your company’s debt, give yourself even more time. Contact us with questions.
