First-time business owners are often surprised to learn that finding a potential buyer and negotiating the key terms of the sale are just the first steps in the process of selling a business.
First-time business owners are often surprised to learn that finding a potential buyer and negotiating the key terms of the sale are just the first steps in the process of selling a business. The due diligence process, in which the buyer gathers information about the business prior to consummating the sale, can be the most complicated and time consuming steps to closing the sale.
While due diligence is often stressful, with proper understanding of the process it becomes far less of an issue. As with most business endeavors, being prepared is half the battle. Below are a few key tips:
Be proactive:
Once you decide to sell your business, it is time to start thinking about due diligence. Buyers will want to examine your financial records, including a current balance sheet, profit and loss statements, tax returns, and accounts payable and receivable, so it’s imperative to have all of your paperwork in order. You will also need to provide information regarding your company’s other cores assets, such as key business contracts, employees, and intellectual property.
Embrace the inevitability:
Buyers will always want to conduct due diligence and obtain as much information as possible about your business. Embracing the process and being as open as possible will not only help due diligence proceed more smoothly, but will also instill confidence in the buyer.
Set parameters:
The due diligence process should be reserved for serious buyers. It is advisable to have a signed letter of intent (LOI) in hand before starting the process. An LOI is an agreement in principle as to certain aspects of the parties’ understandings of what is planned between them so that they can more comfortably move forward in investing the time and energy required to move to contract for the purchase of the business. While in some instances, the parties already have enough information and understanding to include contractual terms, usually the LOI is more about keeping matters confidential and the seller not looking elsewhere for a buyer during the due diligence period. If included in the LOI, exclusivity to the proposed buyer is usually limited to a month or two in duration for the due diligence process before closing on a purchase of a smaller business. To help ensure that the due diligence process does not drag on and cost your business valuable time and money, it is advisable to decide on a timeline with the potential buyer at the outset.
Ensure Confidentiality:
During the due diligence process, you will be required to provide a great deal of information about your business. To prevent the buyer from later using this information to its advantage, particularly if the deal falls through, it is imperative to execute a non-disclosure agreement. The NDA, which can be included as a binding provision in an otherwise non-binding LOI, should expressly state that the use of any proprietary information is limited to the business sale negotiation, that the information is considered confidential and that it shall not be disclosed to others by the proposed buyer. A general listing of what the confidential information is, stamping documents given to the buyer with the word “Confidential” being conspicuous, and stating in cover letters a reminder to the buyer of the confidential nature of the documents are all worthwhile protections to consider.
Limit surprises:
If you have any skeletons in your closet, it is best to disclose them upfront, as the buyer is likely to discover them anyway. Examples include ongoing or potential litigation, weak IP contracts, or outstanding liabilities. By providing the information upfront, you will be able to explain the situation in the most favorable light and avoid creating an atmosphere of distrust.
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