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Due Diligence: a Guide for Buyers and Sellers

Due diligence may seem like an ominous phrase, but don’t let the term scare you off

Due diligence may seem like an ominous phrase, but don’t let the term scare you off.

It’s not just something for the solicitors and accountants to concern themselves with – it’s vital that you, as a buyer or seller, know exactly what's involved (it's actually quite simple when you break it down).

Let’s start at the very beginning: the meanings behind the words. Due – something that’s expected, and diligence – the work, effort and persistence that’s been put into the business.

When put together they become a standard business term for the gathering of information, by a prospective buyer, before investing in a business or franchise.

The investor should be thorough when checking the claims made by the seller; investigating all facets of the business in order to establish its liabilities and assets and evaluate its commercial potential.

This complete appraisal of a business requires looking beyond face value and being conscientious through reviewing and verifying relevant information.

The period of due diligence tends to start after both parties have agreed on a deal and price range, before signing a letter of intent, and usually lasts between 60 and 90 days. After agreeing in writing to go ahead with due diligence, the seller is then obligated to open up the business to an audit.

For buyers

The buyer has the right to look at the company’s assets and records before signing any contracts. Due diligence checks provide peace of mind for both corporate and financial buyers through analysing and validating all assumptions (financial, commercial, operational and strategic).

All limited companies in the UK must register with Companies House to comply with UK legislation. It holds over 2 million records and this is where you can access a business’s latest reports, accounts and financial returns.

As a buyer, you will be looking for an investment leading to profitable returns, and won't want any hidden surprises, so here are a few things to bear in mind:

Research: Make sure you examine the industry and find out as much as you can, assess the competition and look at strategies and trends in the market. Ask yourself questions like:

- Why is the business for sale?

- Can it stay profitable?

- Does it hold enough of the market share?

- What is the current perception of the business?

- What is the future outlook for the business?

Personnel and human resources: Look over the terms and conditions of employment, assess the relevant skills and experience of those employed.

Finance: Check the books, records, cash flow (past and projected).

- Is there any outstanding debt?

- What are the potential returns?

- Is the asking price fair?

Due diligence utilises previous trading history and experience to build up a view of the future, to make sure there’s nothing hidden.

Relationships: Examine the business relations (banks suppliers and lenders).

Intangible assets: Assess the business’ position in the market. How valuable is the brand name and reputation? Are there any patents, copyrights, trademarks, goodwill or business methodologies?

Other things to consider: Location, inventories, suppliers, management, insurance, a strength of the customer relations.

For sellers

For the seller, due diligence checks can seem like an intrusive cross examination of their business. However it is a necessary step in the selling process and for many business sellers, their biggest mistake is not preparing well enough for such scrutiny.

When selling a business (or part of a business) the seller needs to show an in-depth report of its finances to the potential buyer. However, as with buying a business, there are a few important things to consider:

Pitch: Pitch not only to your buyer but also to your team and make sure they are aware of the changes. Think about how you want the buyer to approach your business  what message do you want to get across?

Projections: Whilst its fine to be optimistic, make sure your projections are accurate  unreliable calculations can be damaging to credibility.

Professional help: Making sure that you are well represented can benefit you as a seller: find someone who knows how to sell a business (start considering financial advisors / business brokers/ investment bankers).

Time management: Devote your time, resources and manage them well. Plan your time effectively; you may be negotiating a sale but at the end of the day you still have a business to run while it's still yours.This period can be distracting  make sure you allow time to focus on the business to avoid missing targets and deadlines.

Honesty: Telling the truth is integral to selling. If an investor feels like there is something underlying, or they feel misled, the sale is more likely to fall through. If it doesn’t, the repercussions could be far worse, opening you up to future litigation.

Due diligence is a vital tool in any purchasing or selling decision, however, it is always dependant on the size of the transaction, time available, the cost and availability of resources.

Nonetheless, one factor that should always remain the same is full disclosure, so that both parties are fully confident and happy to proceed. 

Ready to sell? You are just 10 minutes away from advertising your business to 1.3 million prospective buyers. Sell your business today.

Melanie Luff

About the author

Mel wrote for all titles in the Dynamis stable including, and as well as other global industry publications.


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