What do I need to prepare for due diligence when selling a business?
Due diligence is a key stage in the business sales process and involves prospective purchasers analysing the information and data you’ve provided to them as a seller. It takes place once broad sale terms have been agreed but not finalised.
Due diligence provides a safety net for buyers to re-evaluate the business proposition in the light of any issues revealed during this stage. In some cases it can result in a revised lower offer for the business if any anomalies are discovered, or even the collapse of the transaction.
It’s possible to significantly ease this part of the process with careful preparation, however. Understanding the business areas and potential issues the buyer’s solicitor may focus on helps, as does pre-empting their questions and the information/documentation they might request.
Business areas typically included in the due diligence stage
A buyer will request to see the company’s bank accounts and tax documents, and will typically inspect the annual accounts, management accounts, and budgets or forecasts. They’ll need to know about current lending facilities and security that’s been provided to lenders, as well as previous loans and borrowing that has been repaid.
Company structure and shareholding
You should ensure that your statutory registers are up-to-date and that minutes from board meetings are available – in relation to shareholder resolutions that have been made, for example. Any changes in shareholding or restructuring will also be needed.
Having up-to-date written contracts with your suppliers, customers, and other stakeholders conveys efficiency. You can also provide more in-depth data to prospective purchasers, such as the income received from your key customers and costs related to your main suppliers.
- Previous sales and acquisitions experience
- Sector specialisms and average success rate
- Sales value expectations and growth potential
Assets and intellectual property (IP)
An up-to-date asset register makes it easier for the buyer to identify the assets they will purchase. Intellectual property rights need to be registered so they’re protected, including any trademarks, patents, and databases owned by the company.
Employment and pension schemes
The rights of employees are protected under TUPE laws – the Transfer of Undertakings (Protection of Employment) regulations. In this respect, you’ll need to prepare information on staff roles and employment contracts, as well as contracts with any third parties such as consultants or contractors.
It’s important to prepare for requests for pension information during the buyer due diligence stage too, including the pension scheme you run, your rates of contribution as an employer, employee contribution rates, and retirement benefits.
Other potential requirements under due diligence could include environmental issues, such as asbestos in the premises, or perhaps health and safety records. Any documentation relating to previous or ongoing litigation is also likely to be needed, as are insurance policy documents and information confirming compliance with regulatory requirements.
As you can see, a significant amount of information is required for the buyer due diligence phase and it pays to start preparing early. It can smooth the entire process, as well as give confidence to the buyer that you’re efficient and professional.
Selling My Business has extensive experience in securing successful business sales. We can help you prepare for the due diligence phase and provide the professional support you need throughout the sales process. Please get in touch with one of the team to find out more.