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Buyer and seller due diligence during a business sale

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Due diligence consists of taking all reasonable care to conduct an investigative exercise when selling or acquiring a business. By taking the steps necessary to confirm the legitimacy of the opportunity and accessing essential information which evidences the true condition of the business you wish to acquire, you can protect your position as a buyer and access true insight into the business opportunity.

When selling your business, conducting due diligence can help you source a buyer with the ideal merit to take on ownership of your company, eliminating any doubts and uncertainty concerning the sale of your business. The due diligence steps undertaken by both parties vary as these can be focused on areas of interest, concern, or curiosity.

Conducting due diligence before a business acquisition

Establishing the commercial value and financial position of the business you wish to purchase requires conducting due diligence during the initial sale process. We take you through key areas which should be taken into consideration when conducting due diligence.

Financial position–The seller will disclose a detailed view of the companies’ financial history if it becomes apparent that you are a clear contender, poised to submit a competitive offer. If you wish to access a snapshot of this before expressing interest, much of this information will be readily available which will usually be tied to a non-disclosure agreement. Companies House provides public access to company records, including company accounts and registered office details. It also houses information about insolvency activity, such as company liquidation or a strike-off request.

Buyer transparency - The most straightforward route to seeking answers to unanswered questions is to directly communicate with the buyer. By speaking transparently about any concerns or enquiries, you can uncover a true portrayal of the company and address any concerns which may hinder you from submitting an offer. It is in the best interests of buyers to lift any smoke screens to maximise the chances of securing a buyer. By shining a light on the finer details of the business, the buyer can ward off any objections likely to arise in the future. As a prospective buyer, accessing this information early in the process can help you make an informed decision and use your time wisely.

By gaining a first-hand understanding of the business, you can interact with the founder who has been instrumental in forging the identity of the company. Having an unfiltered conversation can help gain true behind-the-scenes access which could justify your attraction to a business opportunity and fulfil due diligence requirements.

Market position- When buying a business, you will need to take into consideration existing and future market conditions influenced by policy changes and economic health. The coronavirus pandemic and the flurry of changing industry measures due to Brexit may call for an overhaul of your operational structure, business relations plans and consumer targeting strategy. By pre-empting any consequential changes as a result of Brexit, you can accurately ascertain if the asking price reflects an imminent restructuring which may be required.

Growth potential – This is also a major determiner which is essential to the company due diligence process and should be supported with evidence. As growth potential is largely based on an intangible vision, it is in your best interests as the buyer to track if existing targets can be realistically achieved and how far along the road the business needs to travel to achieve this. By taking stock of company assets, investments, subsidiaries, and analysing trends in financial performance, you can accurately gauge the growth potential of the company.

Media coverage – If the business has been the subject of media coverage, make use of the information which is readily available to assess public image. Positive PR around the brand name can help bolster the reputation of the company and mark key milestones. Using this to gauge general consumer opinion can help uncover if the business is true to its reputation or whether any information provided is misleading. Using social media to track chatter around the brand name is a useful tool to identify how the brand is perceived and customer service levels.

Conducting buyer due diligence during a business sale

Audit your business to identify any areas of concern during the business preparation process. This will help you provide up to date and accurate information in the seller’s pack which is circulated to potential buyers. Confidential and sensitive information should be protected with a non-disclosure agreement and extensive seller due diligence should be carried out before openly disclosing such information.

The information memorandum advertising your business for sale should contain essential information for the attention of prospective buyers which will assist them in fulfilling their due diligence obligations, including any areas which may raise questions, such as employment disputes and previous legal action launched against your company.

Conduct a research exercise to check the average asking price and completion price to gauge general market value, however, a business valuation is best suited to determine how much your business is worth. By reviewing your company, you can pinpoint which areas of your business require improvement, which in turn can help maximise the value of your company.

It is in the best interests of both parties to conduct proper due diligence to ensure the sale progresses smoothly, with no disruption caused due to the likes of undisclosed information. Selling My Business can help you source a genuine buyer suitable for your business, assisting you throughout the due diligence process. We have over 100 years’ collective experience which sharpens our understanding of the industry and buyers.

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