Due diligence is a critical part of selling your business. It’s a process whereby both parties have the opportunity to provide and receive a clear understanding of the financial, commercial, operational and legal state of a business.
If you’re the seller of a business, the terms may require you to stay in your business for a period under the new ownership or it may be determined that the sale value is linked to the future success of the business. Due diligence is your opportunity to ensure that any terms agreed are fair and relevant to the current state of the business.
If you’re the buyer of a business, you need to be certain that that there are no surprises once the business is in your hands. Having an awareness not just of the financial position but critically, how that business is operated, will mean that you can ensure the correct provisions are in place for the successful continuation of it once it’s in your ownership.
There are four main areas covered in a due diligence process:
1. Financial Due Diligence
First and foremost, buyers will want to verify the financial health of a business. Typically this means that they’ll want to see:
- Income statements: Showcasing revenue, expenses, and profitability over the years.
- Balance sheets: Detailing assets, liabilities, and equity to paint a picture of the financial stability of the business
- Cash flow statements: Cash is king and so buyers will want to see cash coming in and going out of the business.
If you’re selling your business and you work with an accountant, they will be able to support you to pull these reports together. If you don’t work with an accountant but you do use accountancy software then often you can run these reports yourself.
If you’re the buyer of a business, then you might want to work with an accountant to make sense of the reports, ensuring that you’re getting the information you need to properly assess the financial health of that business.
2. Operational due diligence
The nuts and bolts of how a business operates. Don’t underestimate the importance of this aspect of the business transaction, thorough process notes, software universe charts, procedure documents, organisational structures and more will showcase how a business actually works. This will also involve:
- Supply chain and inventory: Checking the reliability and cost-effectiveness of suppliers and inventory management. Are contracts in place? Has ‘up-time’ ever been compromised? Have suppliers let you down before? The robustness of this aspect of a business is critical for everyone.
- Production processes: Assessing the efficiency and scalability of your operations. A business is often bought in order to scale it and so due diligence will verifying that the processes are in place to enable this.
- Customer relationships: Reviewing the strength and stability of your customer base. Businesses are nothing without their customers and so painting a picture of the volume of repeat vs new customers, satisfaction levels, delivery issues, common complaints or issues are all important factors.
3. Legal due diligence
This is critical for everyone to understand. Without scaremongering, the greatest business can suddenly falter if it isn’t legally robust. Ensuring all legal aspects of a business are covered is crucial and a good due diligence process will cover:
- Contracts: A review of agreements with suppliers, customers, and employees. They’ll look for the term of the contract, liabilities and warranties, commercial considerations and termination rights amongst other things. If you’re the seller, review these yourself ahead of sharing them and consider investing in legal support to plug any contractual gaps.
- Intellectual property: Which IP assets are owned and are the right legal documents in place to verify this? Are there any current threats or objections to IP protections and how is the business ensuring that it’s horizon scanning to anticipate future issues?
- Regulatory compliance: If a business is operating in a regulated space then it may be that further regulatory requirements need to be adhered to. If this is the case then having a managed area that details relevant policies, contracts, obligations and measures in place to run the business is a good idea.
4. Commercial due diligence
If a business is being acquired then often this is because the buyer sees the future opportunity and value to gained. The final area of due diligence will involve the buyer taking an active interest to confirm if this business will be commercially viable. Some areas of this will be covered via the contractual and customer reviews but additional areas likely to be covered are:
- Market analysis: Evaluating market trends, size, and growth potential. Is this a scaling sector? Are there wider economic factors that will inform the business opportunities? Is there legislation or policy that will inform future operations? These and more are the questions a buyer will be seeking to understand.
- Competitive position: Assessing competitive advantages and potential threats. What new trends are emerging? Are the USP’s of the business defensible? Is the size of the market significant enough to scale?
- Sales and marketing: Reviewing the effectiveness of your sales strategies and marketing efforts. Client avatars, brand positioning, ROI and marketing channels will all be assessed for both impact and future opportunity.
What next?
Due diligence can seem daunting whether you’re selling your business or you’re planning to acquire one. Partnering with a legal expert, such as the team at Jamieson Law, means that you can navigate the process with more confidence. Let us guide you through the steps and make sure that the due diligence process delivers.
Contact us now on 03308 184 248 or fill in the contact form here and one of the team will be in touch to discuss further.
