Business Sales: Due Diligence from the Seller's Perspective

Due diligence for those who sell

A company sales is a complex and time-consuming process that requires careful planning and preparation. One of the most critical phases, and perhaps most time-consuming, is the due diligence process during which the buyer conducts a detailed audit of the company. For the seller, it is important to understand what due diligence entails and how best to prepare.

What is Due Diligence?

Due diligence, sometimes translated to company inspection, is the process in which the buyer reviews the company in detail to ensure that there are no hidden risks or unknown factors that could affect the deal. This is both a time-consuming and important phase, as the buyer gets access to comprehensive and detailed information about the company. During this phase, it is common for the buyer to hire external advisers, such as financial and legal advisers, tax advisers and other specialists, to carry out a detailed audit.

Why is due diligence important to the seller?

For the seller, due diligence is an important phase because it can affect both the purchase price and the terms of the sale. A well-conducted due diligence can strengthen buyer confidence and ensure the completion of the deal. However, if surprises or problems arise during due diligence, it can lead to the buyer requesting renegotiations, adjusting the purchase price, or, in the worst case, withdrawing from the deal altogether.

As a salesperson, it is therefore important to be well prepared for due diligence and to have a clear understanding of which areas will be examined. By being proactive and preparing all the necessary documentation in advance, the risk of complications is reduced and the process goes faster.

Examples of Due Diligence Moments

During due diligence, the buyer will review a range of different parts of the company. Here are some of the key areas typically included in a due diligence process:

1. Financial audit

Financial auditing is one of the most central parts of due diligence. Here, the buyer goes through the company's financial statements, balance sheet, income statement and cash flow. The objective is to verify that the financial data is correct and that there are no hidden liabilities or commitments that could affect the value of the company. In addition, the budget and forecasts and the reasonableness of the financial objectives are examined.

As a salesperson, it is important to have all financial documents and reports in order and be ready to explain any discrepancies or unusual items. A clear and transparent financial statement can help build trust with the buyer.

2. Legal review

During the legal review, the buyer examines the company's legal structure, agreements and regulatory compliance. This includes, among other things, reviewing important agreements with customers, suppliers, and partners, as well as any pending or potential legal disputes. The buyer wants to ensure that the company does not face any legal risks that could affect the execution or value of the deal.

For the seller, this means that all contracts and legal documents should be up to date and in order. It is also important to inform the buyer about any pending legal cases or disputes, as well as how these are handled.

3. Operational review

The operational review focuses on the day-to-day operations of the company, including production processes, supply chains and efficiency. The buyer wants to ensure that the business is efficient and profitable, as well as that there are no operational obstacles that could affect the future performance of the company.

As a seller, you should be prepared to provide the buyer with detailed information about how the business works, what systems and processes are used, and what challenges or areas of improvement exist. A well-functioning and efficient operation is a strong contributor to completing the transaction on favorable terms.

4. Other review

Depending on the industry and the scope of the business, the buyer may also want to review other specific areas. This may include a commercial audit to understand the market and competitive situation, an IT and tech audit to ensure that the company's IT infrastructure and systems are modern and fit for purpose, or a CSR audit. In recent years, background and security checks on management and personnel have also become more common.

For the seller, it is important to be prepared for the fact that these areas may be examined in detail and that relevant information is available. By being transparent and accommodating, the audit is facilitated and delays are avoided.

How to prepare as a seller for due diligence?

Being well prepared for due diligence is critical to ensuring a smooth and successful process. Here are some tips for the seller:

1. Collect and organize documentation: Prepare all necessary documents in advance, including financial statements, agreements, and other important documents. Today, it is common for all information to be collected in a virtual data room that the buyer and its advisers access.
2. Be transparent: Transparency is the key to building trust. If there are challenges within the company, communicate these early in the process and suggest solutions. If that kind of information comes to light late in the process, buyer confidence can be damaged.
3. Hire an advisor: Having your own financial and legal advisors through the due diligence process is often wise as they can help prepare documentation, answer questions from the buyer, and ensure that the seller's interests are protected.
4. Be prepared for questions: Think through what questions the buyer might have and prepare answers. This is especially true for complex or sensitive areas such as financial discrepancies, legal disputes, or operational problems.
5. Set aside time: Due diligence is a time-consuming process and the buyer usually wants meetings during the process and a large number of questions in different areas will be asked.

At FLB Partners, we offer expertise and support throughout the entire sales process, from the preparation phase to the completed sale. Contact us today to discuss how we can contribute to a successful business sale.