Due diligence is a term you’ll hear often within the realm of buying or selling businesses, and it’s something that’s important for both prospective buyers and prospective sellers. Within this latter category, this form of due diligence is often referred to broadly as “sell-side” due diligence.
At My Biz Value, we’re proud to offer data-driven, CPA-prepared solutions that help you determine an accurate value for your business — one of the key elements of sell-side due diligence if you’re going down this road. What exactly is sell-side due diligence, why is it important, and what are some of the key elements involved when you’re considering selling your business? Here’s a general primer.
Basics on Sell-Side Due Diligence
As we already alluded to above, sell-side due diligence is simply the process that prospective sellers go through to prepare their business for a sale. Typically, this will involve putting together all of the necessary documentation and financials to show interested parties, as well as ensuring that your business is running as efficiently and profitably as possible.
Sell-side due diligence also generally includes an evaluation of your business’s value. This is important not just for the purposes of coming up with an asking price, but also for negotiating with potential buyers and getting the best possible deal.
Why Is Sell-Side Due Diligence Important?
There are a few key reasons why sell-side due diligence is so important if you’re looking to sell your business.
For starters, it’s important to remember that buyers are going to be looking at your business very closely — and they’re going to want to see everything in order before they’re willing to move forward with a deal. By preparing all of the necessary documentation and financials ahead of time, you can make the buyer feel more confident in what they’re seeing and move the deal along more quickly.
Additionally, going through the sell-side due diligence process will help ensure that your business is actually ready to be sold. This includes making sure that everything is up to date and in compliance with all applicable laws and regulations, as well as ensuring that your business is running as efficiently and profitably as possible.
Finally, as we mentioned above, sell-side due diligence includes an evaluation of your business’s value. This is important not just for the purposes of coming up with an asking price, but also for negotiating with potential buyers and getting the best possible deal.
Differences Between Sell-Side and Buy-Side Due Diligence
Buyers will also be conducting due diligence on your business if they’re interested in making an offer. This is generally referred to as “buy-side” due diligence, and it’s important to understand the key differences between sell-side and buy-side due diligence.
The most obvious difference is that sell-side due diligence is conducted by the seller (i.e., you), while buy-side due diligence is conducted by the buyer. However, there are a few other key differences to be aware of as well.
For one thing, sell-side due diligence is typically much more comprehensive than buy-side due diligence. This is because buyers are generally only interested in evaluating specific aspects of your business that are relevant to their decision-making process, while sellers need to provide a complete picture of the business.
Additionally, sell-side due diligence is generally conducted before any offers are made, while buy-side due diligence is usually conducted after an offer has been made but before the deal is finalized.
Steps Involved in Sell-Side Due Diligence
Here are the basic steps to follow when conducting sell-side due diligence for your company:
- Know your motives: First and foremost, it’s vital to enter any sale with a clear understanding of your motivations for selling the business. Are you looking to retire? Are you looking to cash out and move on to something else? Having a clear understanding of your goals will help guide the rest of the process. Not only this, but having clear goals is something that will resonate with buyers, who will want to know that you’re selling for the right reasons.
- Assess financial areas: This is one of the most important parts of this entire process, and includes many of the “valuation” areas that are vital for getting the best possible price for your business. This will include a close look at your historical financials as well as any projections you may have for the future. In addition, you’ll need to take a close look at your inventory levels, accounts receivable and accounts payable, and make sure that everything is up to date and accurate. You’ll compare your company’s financials with others in your industry, plus look into whether there are any cash flow issues or other potential red flags that could make your business less attractive to buyers.
- Confirming sustainability: Another important aspect of sell-side due diligence is confirming that your business is sustainable in the long term. This will generally involve an assessment of your customer base, your competitive landscape, and other factors that could impact your business’s ability to continue operating profitably into the future. This is also a good time to take a close look at any potential legal issues that may interrupt your sale.
- Confirming transparency: Finally, transparency is a vital consideration in any business sale. This means being honest and upfront about all aspects of your business, both good and bad. Buyers will be conducting their own due diligence anyway, so it’s better to be up front about any potential issues rather than trying to hide them. Not only this, but honesty is always the best policy when it comes to business dealings of any kind.
For more on the basic steps involved in sell-side due diligence for any business sale, or to learn about our business valuation and related services, speak to the experts at My Biz Value today.