When you are considering an exit from your business, whether it is for strategic reasons or because you’re retiring, selling outright is often one of the most attractive options. Once you have identified a potential buyer, you should be prepared for each of the steps involved in the discovery process.
The buyer will be conducting his or her own due diligence process, which includes a healthy checklist of items to investigate as it pertains to your business. Some of those items can include:
- Charter documents, articles or certificate of formation, bylaws.
- In-depth financial and accounting records, including tax returns.
- A full account of physical assets, including real estate and intellectual property.
- Legal and litigation information such as liens against the business or information pertaining to any ongoing legal action.
- Sales records and customer data.
- Personnel information, including employee agreements.
- Contracts with vendors or third party providers.
- Information pertaining to your good standing and, if relevant, foreign qualifications.
This is only a summarized list of the items potential buyers will be investigating as they conduct due diligence, and a prudent business owner who wants to make the most out of a successful business transaction would be wise to conduct an internal due diligence check before submitting to a buyer’s inquiries. In fact, the first thing you should do, even before you’ve identified a potential buyer, is begin an internal due diligence health check to ensure that your company’s affairs will pass muster under the scrutiny of a buyer’s lens. Many advisors caution against taking your business to market before you have conducted an internal review., in fact.
Now, you may ask yourself, “But do I really need to disclose the small suit we had against a copyright infringer several years ago? We handled that!” You probably did, and that’s all well and good, but think of the potential ramifications if you don’t disclose even those seemingly “small” matters, even those who have been neatly tidied away. Failure to disclose legal proceedings could seriously hamper your relationship with a potential buyer , or torch a deal altogether.
Furthermore, conduct your own due diligence checks on the buyer. What do you know about him or her? What do you know about the management of the company that will be taking over yours once the hypothetical handoff is complete? Take into consideration whether or not you plan to still remain active or play a role within the logistical operations of the company, if you’d like to stay on as an advisor, and how the transition will affect the employees of your company.
Finally, consider reaching out to a business advisor who specializes in the sales, mergers and acquisitions of companies, particularly one who focuses on businesses of your size and in your vertical.