That includes checking on prospective buyers and self-examination
(Editor's note: This is a new monthly commentary by Santa Rosa-based CPA and business adviser Jim Andersen of Burr Pilger Mayer.)
When contemplating the sale of your business, make sure you have handled your side of the due diligence correctly to avoid costly disputes and litigation.
Due diligence from a seller's perspective needs to be broken into two components, starting with the identification of a good prospect and followed by performing due diligence on yourself in order to identify risks and exposures that may ultimately impact the transaction both from a closing and a deal adjustment standpoint.
First, let’s start with the process of identifying a prospect. In order to identify a qualified prospect, it is very important that you set up a team of experts who can simplify the process. A prospective seller needs to pull together an experienced team in order to make the appropriate decisions in the business disposition process. The team should be comprised of your trusted financial adviser who will assist you in selecting a capable investment banker/business broker (depending on the size of the transaction) and a business transaction attorney.
Working from the presumption that your financial adviser and investment banker/business broker have done all the ground work for setting up a good prospectus and financial package, you are now in a position to pre-qualify prospective buyers for your business. The pre-qualification process starts with gathering financial and personal information on prospective purchasers of your business. The number one rule is that the prospective buyer provides you with personal financial statements and references before you, the seller, release any pertinent financial information. At the point of receipt of the requested information, you then need to be given permission to talk to the prospective buyer’s financial advisers including, but not limited to, the accountant, banker and business attorney.
The purpose of this process is obvious — you are verifying that the prospect is not a “tire kicker” and is worthy of having the opportunity to look at your financial records and determine if he or she is truly interested in your business. This process will also eliminate competitors who are just shopping for free information on your company with no intentions of having an interest in buying the company.
Presuming that the pre-qualification process has been successful, the next step is to perform due diligence on your own company. By exposing what your potential “warts” and problems are in advance, you can help avoid common issues that often lead to purchase price disputes and possibly costly litigation going forward.
Once the prospective purchaser has been identified, the advanced due diligence on the part of the seller cannot be over emphasized. When you really think about it, buyers in this current economic environment are feeling increasingly uncertain about the reliability of revenue and profit projections. Moreover, I am seeing more deals subject to revenue and profit earn-outs, which often lead to purchase price disputes down the line. Through planning and analysis, many potential threats can be mitigated. This may afford sellers greater assurance that they will realize and keep a larger portion of the expected proceeds.