Selling a business can be complex and stressful. The process itself involves numerous, different phases. One phase in the process is an “investigation” phase, which is a period of time when potential buyers or investors will investigate or research a business before entering a purchase agreement. This process is more formally known as “due diligence”. Depending on the size of the deal, this process typically takes between 60 and 180 days.
During this time, the seller doesn’t exactly kick back and wait while the potential buyer researches and makes a decision. This is an opportunity for the seller to perform his or her own “due diligence” to discover any potential red flags to address to avoid compromising a potential sale.
When it comes time to prepare for the investigative due diligence phase of a sell-side M&A transaction, the following considerations should be paramount in the mind of a potential business seller.
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- 1. Do your own homework. As mentioned above, it’s equally as important for a seller to perform its own “due diligence” as a potential buyer. This could mean the difference between attracting the right buyer and losing the sale to your competition. If you do your own investigative research from the beginning, you automatically gain a competitive edge and set your business up for a successful sale.
Remember that there are also costs associated with selling a business. A major selling expense is a broker commission, ranging from 10% to 12% of the total sale price of your property. Other costs include attorney fees, transfer fees (for franchises with tied-up agreements), assignment fees (lease assigned to the new business owner), prepayment penalty (involving mortgage), and transfer taxes.
- 2. Start the process early. If you are even considering the possibility of selling your business, then it’s important to start the process early. Take the time and conduct internal audits to identify any improvements that may be needed to appeal to investors and buyers. For example, this could involve organizing financial and client files and records, perform an administrative “clean up”, removing outdated or obsolete technology or implementing security protocols.Many business owners are often unprepared during the selling process as they do not know what to expect. Procrastination can lead to scrambling at the last minute, which could potentially compromise or delay a sale. By being proactive and starting the process early, you can ensure that your business is sold faster and for maximum valuation.
- 3. Plan your exit strategy. No business owner should sell their business without documenting a well-planned and organized exit strategy. This step is important because many potential buyers and investors will often want to review an exit strategy to understand why you are selling your business in the first place. This will be part of a potential buyer’s “due diligence” process.
If you’ve got a rental business, one good exit strategy is to deal with fast cash buyers. If you have rental houses, vacation homes, or apartments, you might want to consider selling them to a reputable cash buyer. If you’re in Winooski, VT, look for Winooski house buyers, to whom you can sell your property as-is. As-is house buyers will save you from all the time, money, and energy it takes to list and sell your house the traditional way.
This is also particularly helpful if you’re in a hurry to sell your property for emergency reasons. It’ll also help you eliminate most of the costs involved in selling properties since there’ll be no need for repairs or real estate agents.
- 4. Get organized. As mentioned above, one of the best things you can do for business before listing it for sale is to get organized. The “due diligence” process is the best time to do this. The first place to start is to get your documents organized, such as financial records, client, and/ or account information. Being organized will show your potential buyers and investors that you have your ducks in a row, which will likely lead to a smoother transaction.
Follow up with potential buyers or investors even if they seem too busy. Others just need some reminders via email or phone call, or you can meet up physically or virtually and discuss the questions that may be keeping them from finalizing the purchase.
If you are unsure of where to start or how to get organized, start by investing in a scanner or other type of storage software. Why not move to a paperless workflow? Storing your documents and files in the cloud will make your business appear more organized and will also make the lives of your staff members and teams easier.
Finally, “due diligence” is just one phase of the process of selling a business that you do not want to overlook or postpone. This is a mistake that many business owners make, and one that ends up costing them dearly. Take the time to conduct internal audits and get organized. You will thank yourself in the end!
Nate Nead is an investment banker who assists clients in mergers and acquisitions transactions. He has assisted clients across the middle market in deals ranging from oil & gas to software and SaaS. He specializes in preparing companies for sale and maximizing the value of the business upon exit. He resides in Seattle, WA.