If you’re thinking of selling your business be prepared for an onslaught of questions from potential business buyers. If you know what they want in advance you’ll have an excellent chance of preparing.
Here are some of main areas of inquiry business buyers will scrutinize before you can sell your business.
Due Diligence Process
When the Buyer and Seller execute a Letter of Intent re: a possible transaction and terms, the business is taken off the market and due diligence then begins in earnest.
The buyer or its agents will conduct due diligence of the books, records and operations of the Seller to its complete satisfaction.
Ninety percent (90%) of the business buyer’s emphasis will be on the Profit and Loss Statement (P/L) to help them understand how the P/L provides cash flow.
The business buyer will normalize Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA). They are looking for non-recurring items of revenue and expenses such as legal fees, insurance settlements, professional fees, excessive owner compensation, above or below market rate rent expense, personal expenses, etc.
The business buyer will analyze profitability by product, customer and geography. They will look carefully for any operating expenses being charged to depreciation or interest expense which has the effect of fraudulently increasing EBITDA.
On the balance sheet, the business buyer scrutinizes changes in reserves which might reflect out-of-period costs that have an adverse effect on the P/L period under review.
Due diligence also has a perspective for the Seller. Sellers typically rely on a Trusted Advisor to coach them through this process—getting things cleaned up and controlling the process. The Seller must come to understand the true value of the business. This requires diligence. Fix what you can fix in advance of entertaining potential buyers. Set and manage expectations along the way.
The primary objective here is to arrive at an amount the Seller “needs” for the business—not what the Seller “wants”.
Are your books in order? Are your systems in place and above all are they easy to read and understand?
What is the status of your receivables and do you have deadbeat customers and late payers? The confidential nature of your customers dictates that your customers be named A, B, C, etc. until the final stage of due diligence. Then the Buyer will meet the important customers.
Are you under investigation or is there litigation pending?
Do you have signed and current contracts with your customers, employees and vendors?
When does your lease expire and what are the terms?
Are your business license and operating agreements up to date?
Are your ideas, proprietary products and processes protected by patents or trademarks?
What are the terms of your credit agreements?
Potential business buyers are going to want to understand you and your team as well as your company. They are going to dig deep into your vision and understanding of the industry. Don’t be surprised if they ask the following questions:
Why do you want to sell your company?
What do you see is the future of your industry?
What is your vision for the future of this company?
Unasked but most certainly ascertained – Will you be replaceable or is your company too dependent on your involvement?
Do you have an excellent leadership team in place and will they be prepared for the transition?
In addition to the above due diligence a prospective business buyer will delve into, you can expect more questions about:
Your Products or Services
Your Customers & Market Share
Your Operations, Distribution & Back Office
If you need a trusted advisor to help you through the process of selling your business or have questions about the process you are already involved in, please feel free to get in touch.