facebook twitter instagram linkedin google youtube vimeo tumblr yelp rss email podcast phone blog search brokercheck brokercheck Play Pause
Ep #036: Navigating the Due Diligence Process Before a Sale Thumbnail

Ep #036: Navigating the Due Diligence Process Before a Sale

When a prospective buyer is interested in acquiring all or a portion of your business, they will have the opportunity to thoroughly investigate your books and records. They will get the chance to look at, analyze, and review everything. This is the due diligence process.

We will discuss:

  • What goes into the due diligence process?
  • When does it begin?
  • Best practices to follow
  • What documents are requested from a potential buyer that you should have prepared in advance?



If you like the Business Exit Success podcast …

Never miss an episode by subscribing via Apple Podcasts, Spotify, Stitcher, Google Podcasts, Amazon Music or  RSS!


"Okay so we are diving into the Due Diligence Process when selling your business. We’ll talk about what goes into the due diligence process, when does it begin, some best practices to follow when going into due diligence, and what are some of the typical documents that are requested from a potential buyer that you should have prepared in advance."

What is the due diligence process?

"So first understanding the due diligence process. The Due Diligence process before selling your business is known to be the most rigorous and overwhelming part of the entire process. This is because you're going to open all your books and records of your business to the prospective buyer for them to take a look at, analyze, and review. They will go deep and they will want details."

When does due diligence begin?

"This phase comes about when you receive an offer from a potential buyer and you enter into a Letter of Intent otherwise known as a LOI. The letter of intent is a document issued by a buyer who wishes to purchase all or a portion of your business. It basically lays the ground rules for the business sale process on both the buyer's and seller's end."

"A Letter of Intent will include things like the timeline for completing the sale, a timeline for completing the due diligence process, it can detail when buyers gain access to the sensitive business information like vendor contracts, proprietary documents, company product specific information, etc.

The letter of intent also includes a potential purchase price. Now one thing to understand here is the due diligence process is when that purchase price can potentially go down from the prospective buyer finding weaknesses in your business. "

"The buyer's goal is to confirm that what you actually said to them about your business is accurate, justifiable, and correct or not. So the sooner you can get ahead of the game on preparing for the due diligence process, the better."

"The last thing you want is for the buyer to request a piece of information from you and you don't have it. Or what you have is not detailed, accurate, or justified."

What are the best practices to prepare for due diligence?

"Here are several best practices to prepare for this process:

"Be organized. You are going to be dealing with a tremendous amount of information. Being prepared and organized will be critical as you go through the transaction process."

"Be thorough. Be as thorough as possible. Make sure to compile all the potential data and information. If you come back with only half the requested documents, more questions will be asked to dig deeper into the reasoning. "

"Once weaknesses are identified in the due diligence process, you cannot change it. The way your business is at this point in time, is the way it is. So you need to identify the areas of your business where you are weak."

"Address your weaknesses. Have explanations for them. Have the justifications that will support the fact that there is no reason to discount and reduce the purchase price."

"Avoid hiding information. Hidden information or facts can result in discounting the purchase price so make sure to identify these areas and explain them beforehand."

What documents are typically requested for due diligence?

"So what actual documents are typically requested? I’ll run through some of them here, this is by no means a complete list of everything. Everybody’s business is different but the majority of the ones I will mention are relevant for most businesses out there. You can view this list in the show notes. I will have a link in the notes section of the podcast app so you can easily click the link from your phone and gain access to it."

"So the first one is Corporate Documents. Most of you should have these. This is your articles of incorporation, formation papers, buy-sell agreements, and Shareholder Information so a buyer can understand who owns the business."

"Next is Financial Information. So your financial statements. This is a key area. They’ll want to see the last 3-5 years of financial statements, and hopefully, they have been audited or at least revied by a CPA firm. These documents include your Profit and Loss statement, balance sheet, and cash flow statement. They will also like to see the last 3-5 years of your tax returns. Another important part of the financials is providing financial projections with assumptions for the next 3-5 years. A buyer will want to see a growth path for the future of your business."

"Next is Products/Services. Do you have a list of all product lines and service lines that you offer? This will include sales and gross profits by product line for the last 3-5 years and year to date."

"Then there's your clients. They will want to review a list of all your customers and if you have maintenance agreements in place. Having sales revenue broken down by customers for the past 3-5 years and the current year."

"The last one I’ll mention is Sales and Marketing Information. So having a complete breakdown of your sales for the past 3-5 years and if you can have that broken down by customer that would be even better. Examples of your current sales process, sales proposals, and marketing materials are something they will want to look at as well."

"There is much more included here and again I’ll have it broken down in a checklist format in the show-notes. But this can get very detailed. Because if you consider from the buyer’s perspective they are looking to see if there is a synergy between your company and their company."

Final due diligence tips.

"Be thorough and comprehensive in the cleanup and preparation of your business."

"Create an online library for all the data, so it can be organized and easily accessible to the buyer if and when you go down this road of due diligence. Create separate folders on a cloud-based software that’s encrypted or on your filing system that you currently use for your business. And what happens is you begin to package your business, so when the time comes and someone wants to consider an acquisition, you’ll be ready to go."