Featured Article Image - What Buyers Look for Due Diligence

Part Vll: Selling The Business?  Here is What Buyers Will Look For During Due Diligence

Ready to assess your due diligence readiness? Submit Form to access our Free Due Diligence Checklist

NoteThis is the last of a seven part series that addresses the key questions that you, as a business owner, need to really focus on as you begin to think about the sale of your business.  This series will give you actionable insights on assessing your readiness to sell, what you need to do to be prepared for the process and what real success will look like post sale.  Happy reading!

Successfully selling a business has several phases.  One particularly important phase, which is often underestimated in its complexity and impact is the due diligence process. Before an offer is finalized, potential buyers will meticulously review your business to confirm its financial health, legal standing, and operational stability. Here’s how to ensure you’re prepared for a comprehensive due diligence review.

Business and Financial Projections

Your financial projections are more than just numbers—they are the blueprint for your company’s future. Buyers will scrutinize these projections to assess the reliability of your growth assumptions.

  • Are your financial forecasts realistic and supported by underlying data?
  • Have you clearly outlined assumptions regarding market trends, customer acquisition, and cost structures?
  • Very importantly, do your projections align with historical performance, or do they paint an overly optimistic picture?

Providing a well-structured financial forecast that clearly articulates key assumptions not only builds credibility but also helps mitigate buyer skepticism.

Accounting and Quality of Earnings

When it comes to due diligence, up-to-date financials are really important. Ideally, these financial statements should be prepared or reviewed by an external accountant to ensure accuracy and transparency. If you are planning to sell in the next couple of years, you may want to consider starting to produce interim (at least quarterly) financial statements.  Updated performance will be important to prospective buyers if the last published financials are more than 3 months old.

  • Are your financial statements prepared by an outside accountant or auditing firm?
  • Are quarterly financials available to provide a more recent look at financial performance?
  • Are there any non-recurring or discretionary expenses that could impact normalized earnings?
  • Are all cash flow statements, profit and loss statements, and balance sheets readily accessible and well-organized?

Additionally, for businesses with complex financials or those seeking to maximize sale value, a sell-side Quality of Earnings (QoE) report can be a powerful tool. This report, commissioned by the seller, provides a buyer’s perspective on the financials, verifying that revenue and profit figures are sustainable and free from anomalies. By proactively addressing potential concerns, a sell-side QoE can reduce the likelihood of renegotiations and help maintain deal momentum.

Tax Liabilities and Compliance

Unresolved tax liabilities can derail a deal. Buyers will be keen to understand your tax history, current obligations, and any pending issues.

  • Are all tax returns for the past 3-5 years readily accessible?
  • Have all tax payments been made on time, or are there pending liabilities?
  • Is there any exposure to tax audits or disputes?

A clean tax record helps to foster trust and streamline negotiations.

Employment Practices and HR

This is perhaps the area of greatest deficiency I see in businesses as they approach the sales process..  Employment practices can reveal potential liabilities and operational risks. Buyers will want to review contracts, compensation agreements, and key employee arrangements.

  • Is HR related compliance data readily available and organized?
  • Are employment agreements and compensation terms clearly documented?
  • Are there contingency plans for key employee retention post-sale?
  • Is your organizational structure defined, with clear roles and responsibilities?

Addressing HR-related risks upfront can prevent unpleasant surprises during due diligence.

Insurance Coverage

Buyers will want to ensure that all assets and liabilities are adequately covered by insurance. Uncovering gaps in coverage can lead to unexpected costs post-transaction.

  • Are all business assets sufficiently insured?
  • Have you reviewed potential claims and liabilities under existing policies?
  • Are there any pending insurance claims that could impact the sale?

Updating insurance policies and documenting all coverage areas can reinforce buyer confidence.

Technology and Intellectual Property

Intellectual property and technology assets can be significant value drivers—or liabilities—depending on how well they’re managed.

  • Are patents, trademarks, and copyrights properly documented and up-to-date?
  • Are cybersecurity measures clearly outlined and implemented?
  • Are all technology licenses and software agreements current and transferable?

Ensuring strong protection of intellectual property and maintaining updated technology agreements are often overlooked steps in due diligence preparation.

The due diligence process is not just about presenting financial statements—it’s about demonstrating operational readiness and minimizing perceived risks. By proactively addressing these key areas, you can present a well-prepared business that instills confidence in potential buyers.

Leave a Comment

Your email address will not be published. Required fields are marked *