by Michael Iverson
Selling a business can be an exhilarating experience. Meeting with potential buyers, presenting the business in the best light possible, fielding inquiries, receiving preliminary bids and conducting early-stage negotiations is all part of the process. It’s pretty exciting compared to a typical day at the office.
At a certain point in the process, however, the excitement of an impending sale gives way to something much more serious. The would-be buyer’s offer is usually contingent upon completion of a due diligence review. The buyer gets a chance to conduct a very thorough examination of the business. If the review uncovers unpleasant surprises, it may be possible for the buyer to walk away from the deal.
No Stone Unturned
The buyer may well be making the biggest financial commitment of his or her life, so he or she wants to be sure about the purchase. Confirmation usually comes from outside professionals who advise the buyer through the due diligence period. At the very least, expect visits to your business by an accountant and an attorney representing the buyer. These experts will advise the buyer about whether he or she is making a wise purchase decision. Make sure everyone handling your data has signed a Non-Disclosure Agreement, then provide them the information they request.
Information requests from the buyer’s accountant are likely to include, but not limited to:
- Financial statements for recent years and related audit reports
- Tax filings for recent years
- Financial projections, capital budgets and strategic plans
- The business’ general ledger and schedules of Accounts Payable and Accounts Receivable
- Schedule of inventory
- A schedule of capital equipment, its location(s) and copies of purchase contracts or leases
- A schedule of depreciation/amortization calculations related to equipment
- A list of real estate owned or leased, plus copies of mortgages, deeds or leases
- Analysis of fixed and variable expenses
- Details of debt covenants and credit lines
The buyer’s attorney will likely want to review the following documents:
- The company’s Articles of Incorporation, Bylaws and Minutes of the Executive Board
- The company’s organizational chart
- The company’s list of shareholders
- Certificate of Incorporation
- A schedule of any intellectual property of the company, including trademarks, trade secrets, patents, licenses, agreements with personnel and consultants providing technical know-how.
- A list of litigation settled or pending; regulatory proceedings against the company; environmental actions pending.
- Insurance coverages protecting the company and Executive Board from general liability, personal liability, product liability, errors and omissions, workers’ compensation, etc.
In addition, the buyer will want to see information about your product or service lines, customers, key suppliers, major competitors, and marketing programs of the company.
As you can see, the process will test your record-keeping and organizational skills. I often stress the importance of developing a business infrastructure. This is the occasion when all of the time and effort pays off for having a well organized and documented financial, operational, sales, and administrative processes.
Managing the Process
The buyer and his or her advisers have every right to gather the information they need to evaluate the business. You have every right to make sure their work doesn’t become disruptive to your business, your employees’ work and your clients.
Manage the process by setting a few guidelines for retrieval of information. The buyer’s requests should be made directly to you, or your designee. If the provision of information cannot be immediate; encourage the buyer to request things in advance.
The due diligence process can be very intense and emotional. Have key advisors to surround yourself so that you can keep your eye on moving the business forward. Understanding what to expect can save you a lot of time and emotional energy.