Vendor Due Diligence

You have spent years of hard work building your business and now you have decided that it is the time to sell. Next to selling a property, selling a business is one of the largest releases of equity most people experience in their lives.

You have received a letter of intent or heads of agreement, with an offer from a

prospective buyer which is conditional on satisfactory completion of due diligence

(usually within a specified period).

What to expect in Due Diligence

Due Diligence involves making available your business documents available at the request of the purchasers’ advisors, which is usually their accountant and lawyer. You will normally upload this information to a “data room” which is normally a secured website which acts as the central repository for all parties involved in the transaction.

The purpose of due diligence is to validate the information provided, analyse the financial strengths and weaknesses, and identify areas of potential risk.

The due diligence process can be very time consuming, resulting in your time and

resources being diverted away from running your business. The timeliness and depth of your responses to information requests, helps develop trust with the purchaser. If however, you are not prepared for the process and there are delays responding to information requests, then this causes friction with the purchaser and their advisors.

How to prepare – Vendor Due Diligence

The process of vendor due diligence can assist you in preparing your business for sale. When a property is being prepared for sale, a vendor will put new paint, carpet and stage their property. It is less common for sellers to apply the same mindset when selling their business.

It is ideal to start the preparation process before you list the business for sale. We have outlined below some key areas to focus on when preparing your business for sale.

Business Documents

Pull together all the important documents for your business. This includes everything from company documents, financial and legal documents. Make sure all documents have been signed by all parties! If they haven’t, request signed copies or arrange for documents to be signed. Where contracts have been superseded or amended, make sure that they are all on file and signed.

Customer and Vendor contracts: You may have a number of arrangements which are not documented and business has been conducted under a “mutual understanding”. To a purchaser this represents a risk, perhaps even a significant risk. It is worthwhile formalising these arrangements so that the purchaser can perform their financial analysis with a degree of certainty. It is worthwhile checking that your insurance is up to date at this point, as inadequate insurance cover is another risk that a purchaser can use to negotiate price.

Have all the documents easily assessable. Review these documents in advance.

Financial Records

The first part of any financial due diligence exercise is to get comfort over the “quality of information”, or in other words, a high-level review of the accuracy of the financial records held by the business.

Ensure that your reports from your accounting system, match your signed financial statements and tax return. It would be worthwhile engaging with your accountant to ensure that you understand what numbers they have used to compile your financial statements and tax returns, including adjusting entries they have posted.

Perform a thorough review of your balance sheet. Are there any old debtors which need to be written off? Any old stock which has become obsolete and should be written off? This is a good opportunity to clean up your balance sheet and demonstrates that you proactively review your financial position.

Staff Records

Although this forms part of the business records, it is an area which is so significant that it warrants separate mention. Ensure that all employment contracts and contract amendments are signed by both parties. If you are selling the shares your business, then your calculation of annual leave entitlements will be an area of focus for the buyer. If you have staff who work variable hours, an external review of your annual leave calculations can highlight potential issues which need to be rectified.

With vendor due diligence you have the luxury of time, which you do not have once a potential buyer is conducting financial due diligence on your business.

This exercise is about “getting your house in order” and the context does not need to be linked to selling the business. Therefore, it could be appropriate to allocate tasks to staff as necessary.

If you would like to learn more about vendor due diligence and its potential to get the best price for your business, contact us.