Sell-side due diligence—what you have to do now even if you don’t think you’ll ever sell.

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Sell-side due diligence—what you have to do now even if you don’t think you’ll ever sell.

By Anna MaskerIn standard11th February, 2016

sell profiValue is in the eyes of the beholder, right?  So if a buyer were to approach you today, is your business ready to sell?  Selling a business isn’t for the faint of heart—it’s an arduous and rigorous process of opening your company to outside scrutiny.  If you have a sophisticated buyer, everything gets scrutinized– your financials, your processes, and your people.  Not only is this time consuming but it is a draining process which then culminates in the buyer trying to reduce their original offer.   It’s not pretty.

What’s one way you could prevent (or at least mitigate) some of that pain?  Get your “stuff” together now, way before you ever approach the negotiating table.

It’s called Sell-Side Due Diligence.  It means you run your business through the rigorous diligence process a buyer would with the ultimate goal of fixing what’s wrong NOW so that in the future you have a sellable business and a significant amount of credibility and negotiating power when you approach the table with a buyer.

We’ll speak to the financial piece of it but there are many more operational and legal pieces that need to be put in place for you to be in a strong negotiating position.

Here’s the thing—even if you never intend to sell your business, doing a sell-side due diligence exercise only has upside for you and your business. 

Even if you aren’t thinking of selling—ever—it’s a good exercise to run a sell-side due diligence, because it will maximize the return you are getting from your business.  No matter if you want to run your business until you are old and gray, or you want to sell in a few years, you need to get this straight now—because either you need to have believable track record to show prospective buyers or you want to have a business that can run without you.

  1. Get your financial house in order— there is nothing that unwinds deals or devalues companies faster than financials that are sloppy, inconsistent or don’t tell a good story. What’s equally important is showing your buyer you have standard operating procedures and controls in place to give them confidence in the numbers they are seeing.  They want to track records of growth, consistency in way things are booked, clean, readable financials.
  2. Put your best foot forward. So maybe your business is in a flat market, or maybe there are parts that are underperforming.   If you have more profitable product lines or divisions within your business you want to make sure you carve those out in your financials for easy visibility and showing historical performance.  Certain parts of your business may be more valuable than others; for example if you have a monthly recurring revenue stream, pointing that out may help you increase your multiple.
  3. Paint the picture— Just as you would show a client how your product or service improves the lives of your clients, the same goes for your business. You need to position your company as a natural add-on to a buyer.  Even if you are not considering selling, understanding who might be a good buyer may lead to strategic alliances or other opportunities to expand your business more than if you kept things status quo.
  4. Know where the bodies are hidden. We all can be… ahem… generous, with the perks we run through our businesses to support our lifestyles and keep Uncle Sam out of our pockets.  Know where those perks are being booked so they can easily be backed out and proven to the buyer as expenses the business would not incur should it be bought.  If, for nothing else, you should look at your profitability excluding personal expenses to know what your income is before all the perks.
  5. Give yourself a long horizon. Change takes time, as does building financial history and infrastructure to put your best foot forward at the negotiating table, whether you want to or not to sell.  As a general practice you want to start the process 3-5 years before you want to exit.

Going through the process of sell-side due diligence is a good exercise whether or not you want to sell.   Not only will it make you consider your business’ value from an external perspective but it will also allow you to make improvements that you might not have otherwise seen as needed.

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