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  • Michelle Law

Getting ready for the due diligence process: tips for sellers


The due diligence phase is a critical juncture in any business sale, allowing potential buyers to scrutinise the legal, financial, operational, and commercial facets of your business. Thorough preparation can help keep the transaction timetable on track by ensuring you have ready access to the documents needed and can respond to due diligence questionnaires in a timely manner.


This guide offers comprehensive advice on how you can best prepare for due diligence, ensuring a smooth and organised sale process.


Understanding Due Diligence


Due diligence involves a comprehensive examination of a potential investment to confirm all facts and identify risks. In the context of business sales, it means buyers will examine every aspect of your business, from detailed financials and contractual obligations to human resources, compliance matters, and market position. The depth and focus of due diligence may vary across different industries, adding a layer of complexity to your preparation process.




Infographic of key areas of due diligence in a business sale


Financial


A clear financial record is the backbone of due diligence and instils confidence in potential buyers. Maintaining up-to-date, accurate financial statements is crucial. You should prepare detailed reports of revenue, profits, debt, cash flow, and major expenses, with monthly breakdowns available. Historical data spanning several years should be included to provide a complete picture of your business's financial health and providing a detailed cost breakdown of key suppliers and roles will help potential buyers assess where there could be cost synergies.


You will need to help a buyer to see what the underlying performance of the business looks like. To do this, you adjust financial statements to reflect a normalised level of profit, accounting for any one-off or exceptional items for example, a non-recurring legal expense or an unusually large bonus payment. It’s also important to clearly separate directors' remuneration and pension contributions as this can throw off the numbers, particularly in smaller businesses.


Future financial projections can also demonstrate your business’s growth potential. You can read more about crafting a compelling growth story here.


Tax


Ensuring all your tax affairs are in order is very important. You should provide comprehensive documentation of compliance with all relevant tax laws, including VAT, payroll taxes, corporation tax, and any international tax obligations if applicable. Copies of your tax returns, details of previous tax audits, ongoing disputes, or settlements with tax authorities should also be included. This transparency allows potential buyers to assess any financial risks and ensures that there are no hidden liabilities that could affect the transaction.


Legal & Regulatory


Organising all business licences, contracts, leases, and legal agreements is fundamental. You must ensure compliance with all relevant UK laws, including employment, health and safety, environmental standards, and industry-specific regulations. Failure to comply with these regulations can result in substantial financial penalties or legal challenges, potentially derailing a sale.


Additionally, managing and protecting your intellectual property (IP) is something buyers will look at, especially if your business operates in technology-driven or creative industries. Your website is a good example of IP that most businesses have. Documentation should include registration details, proof of ownership or licensing agreements for patents, trademarks, and copyrights. A list of any past or pending litigations with details and current status should also be prepared, including any IP disputes.


Technology & Cybersecurity


In today's digital age, the integrity and security of your IT infrastructure are paramount. You should review and document all aspects of your technology systems, including hardware, software, data management, and especially cybersecurity measures. This review should cover software licenses, the security of your networks, and any measures you have in place to protect against data breaches.


With the enforcement of GDPR and other data protection laws, you must be ready to demonstrate compliance with data privacy regulations. You need to show how personal data is collected, used, and protected within your business. Documentation should include data protection policies, GDPR compliance measures, and any records of data handling training provided to your employees. This will reassure potential buyers about the resilience of your business against cyber threats and your commitment to data protection.


Operations


Documenting key business processes and workflows helps demonstrate your business's operational efficiency and its capability to operate independently of the current ownership. Ensure your fixed asset register is up to date, and consider whether any of your kit and equipment might need replacing soon. Reviewing and preparing details of all supplier and customer contracts, especially those that represent long-term agreements or significant clients, is critical.


Property


Effective management of your business property is another component of due diligence. It's essential to ensure that all property deeds, leases, and related documents are accurate, up-to-date, and fully accounted for. This includes having clear records of any real estate owned by the business, lease agreements, and terms for any properties you rent or lease out.


Human Resources


Prepare detailed (but anonymised) profiles of key team members, highlighting their roles, qualifications, experience, and contributions to your business. Employment contracts and policies must be up-to-date and compliant with UK law. Details of any existing employee benefits, training programmes, and retention strategies will add further understanding of your business. You'll need to provide all administrative and financial details of the company pension scheme. Considering the cultural fit and leadership capabilities of the team may also be a point of evaluation for potential buyers.


Commercial


Commercial due diligence is pivotal in assessing your business's market viability and growth potential. For a thorough analysis, you should provide a detailed breakdown of key customer lines and examine client concentration to highlight dependencies or diversification in the customer base. It's also crucial to illustrate the strategies you use for acquiring new clients and the rate of repeat business or recurring revenues, as these factors indicate your business’s market penetration and customer loyalty.


To protect sensitive business relationships, it is advisable to keep specific client information anonymised until the later stages of a transaction. This approach ensures that detailed client data is disclosed only when necessary and under appropriate confidentiality agreements. Such prudence helps protect commercially sensitive information while still providing potential buyers with the insights needed to evaluate the commercial strengths and sustainability of your business.


Datarooms


Once the due diligence process is underway with a buyer, your due diligence documents will be uploaded to a virtual dataroom (VDR) often hosted by your lawyer. This works like a Dropbox or Google Drive, to protect data security and confidentiality, allow for controlled access, and help organise documents effectively. Initially, to prepare for this, you can simply organise your existing documents on company drives; this not only ensures that all documents are current and complete but also highlights any gaps and gives you time to track these down well before they are asked for them in a live due diligence process. Ideally, setting up a VDR should be considered early in the sales process to streamline document management.


Conclusion


The due diligence process is a golden opportunity to demonstrate the intrinsic value of your business. Effective preparation underscores professionalism and operational excellence, fostering trust among potential buyers and helping pave the way for a successful sale. Start preparing early to ensure a seamless process and to showcase your business in the best possible light.


If you would like some help with this process, get in touch with me via the contact form to arrange an introductory call.

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