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Selling your biz? What to expect from a buyer’s due diligence process

27 February 2017 No Comment

Clive Hyman lo res

What happens if someone wants to buy your small business? If they know what they’re doing they will follow a diligence process – meaning plenty of questions for you.

  • Initial steps

What are they buying? Is your company co-owned, or have ownership of common assets? With family businesses, they will want to understand the business relationship between family members. They likely to want to meet your bookkeeperand whoever prepares your accounts.

  • Management of the business

Questions will focus around what you have achieved to-date. Are you meeting your business goals? Do you have a good reputation in your business sector?

  • Heads of agreement

A serious potential buyer will want “heads of agreement “as soon as possible. This will provide a reference point as your discussion progresses. A final deal will be subject to a Sale and Purchase Agreement (“SPA”).

  • Financing the purchase

You may want to check early on that your would-be buyer has financing.

It is frighteningly common for potential buyers not to have offers subject to due diligence. You don’t want to be disappointed and find the deal falling apart at the last minute.

  • Established business or startup

If your business is fairly new you won’t have a significant track record for your buyer to examine. They will have questions about your plans to make money over the coming years. For example how many customers do you have who are keen to buy you product or service?

If you have an established business the next points become even more relevant.

  • Results achieved so far

Your buyer will want to understand your results in detail particular the cost base you have. They will want to establish how much cash they will need to invest to drive the business and achieve good profits.

  • Budgets and forecasts

You will be asked for budgets and forecasts. Do these suggest you can meet your business goals? They’ll want to make a judgement on how well you are doing and to get a feel for whether you are a conservative business person or one who is a bit racy or overly-optimistic.

  • Earnings Before Interest Tax Depreciation and Amortisation (Recurring EBITDA)

EBITDA shows the recurring profitability underlying all the other figures. It offers a ‘clean’ figure to use for comparisons. Expect intense questioning. Your buyer will want to understand the profitability of the business to help decide what to pay for it.

  • Drive the selling process

If you are sure you want to sell your business help to drive the deal. This means the process and communication between all parties. Talking to each other is vital! Don’t be one of those sellers who lost a potential buyer through poor communication.

If you are helpful and polite (even when the process gets stressful which it probably will) you improve the chance of reaching a mutually satisfactory agreement in a sensible timeframe.

Due diligence will help identify issues. It will allow your buyer to make an informed decision about whether this deal is a go/no go and what s/he should/should not be paying you. Your involvement will also help you be clear what price you should be selling for.

ABOUT THE AUTHOR

Clive Hyman FCA is founder of Hyman Capital Services offering expertise in due diligence and managing change in business including raising equity and debt capital, mergers and acquisitions, interim management, board management and governance, deal structuring, and company turnaround. See: www.hymancapital.com

Social media:

https://www.linkedin.com/in/clivehyman

Twitter: @clivehyman

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