When you want to sell a business, you must prepare yourself and the documents well so that you avoid falling into the innumerable traps that exist in such transactions. Buyer or a seller, due diligence investigation is an essential factor in this context.
However, as a seller, you must conduct your due diligence with the help of your professional advisors before the buyer performs the same exercise.
With regard to Due Diligence for sale of business you can engage lawyers and accountants to conduct the following functions:
• A careful review of all documentation such as reports, tax returns, and financial statements
• Review of corporate records including stock ledgers, shareholder minute books, organizational documents, and agreements with the shareholders
• Check all material records and agreements related to the business collectively termed as the ‘Material Business Documentation’ and
• Identify and make corrections of any issues relating to the business.
It is also required to ensure that no confidential information is shown to the buyer until it is certain that the transaction is very likely to be fruitful. Make sure that all Material Business Documentation is gathered in a data room for the buyer to review and if need be engage a third party for the business valuation process.
Prepare a team
In this regard, you can prepare a team of your own that may include the key managers of your business. These members must be responsible enough to conduct a meeting or several meetings with the buyer or any of its representatives.
• They must be knowledgeable and adept enough to handle different issues in the systems and answer several questions from the other side and comply with the requests that they might make during the negotiation process.
• They must be well versed with the steps involved and work towards the successful completion of the transaction. It is also required to know about the preparation process and execution of the confidentiality agreement, employment agreement, letter of intent, and most importantly the purchase agreement.
If you find that this is asking for too much from your team, then you can always take help of the top due diligence firms in India to ensure you do not fall into a trap or get less than what you legally deserve.
Conduct the due diligence early
The process of due diligence is mostly related to analyzing the potential buyer. This is done by going through the corporate records, material agreements, and other reports. As due diligence is not a one-sided process, the buyer will also do the same for the business that it seeks to acquire, commonly termed as the “target company.”
In both the cases, parties must devote a lot of time in analyzing all facets of the business. Usually, problems arise when the due diligence investigation of the buyer affects the time, viability of the transaction, and the amount of the purchase price.
All these can be avoided with a careful review of the Material Business Documentation of the seller which you must ensure is ready at all times. You must also ensure that your report is error free and there is no scope for the buyer to uncover any problems which will further linger the process.
Make sure that if there are any issues, you and your advisory team identify it and resolve it beforehand.
It is, therefore, necessary to conduct internal due diligence first to know the risks, issues and cost to minimize the length associated with the due diligence review by the buyer of the target company. It will also reduce the stress and workload that usually comes with a business sale.
Use a checklist as a guide
There is a specific checklist to use as a guide when you prepare for Financial and legal due diligence and conduct it with your team comprising of an attorney, CPA, broker, appraiser, and a personal financial planner.
Get an accurate business valuation though it is not a simple process and takes a lot of time even months to complete. This is a crucial tool for successful negotiations. The appraiser can help you in this matter and take the right approach to determine the accurate valuation.
Compile the financial and tax documents as all buyers expect to buy a business that has its finances as per the M&A deal rule. There are many different documents required for due diligence that includes and is not limited to:
• Audited financial statements including earnings and cash flow statements and balance sheets
• Credit reports
• All commercial paper, promissory notes, letter of credit and loan or credit agreements
• Financial surety and performance bonds
• Detailed schedules of any prevailing defaults regarding credit arrangements
• All federal, state, local as well as foreign tax returns
• Tax Liens
• Employment tax filings and
• Real estate property tax filings.
As for the legal and liability issues and diligence, the list must include all permits and licenses from relevant authorities along with any threatened or pending proceedings or actions that may result in legal hassles and even suspension or revocation of the business registration and activities.
Other fields to focus on
There are a few other areas in which you must focus on during due diligence preparation and process.
• Intellectual Property – Documents for this includes patents, copyrights, innovations, and others.
• Operations – It includes business processes vendor and customer relationships and management systems.
Customer base, organizational charts, human resources, marketing information, is few other checks that will potentially raise the valuation of your business.
Seema Mehra is a Chartered Accountant at Ashok Maheshwary & Associates, top accounting firms in india that provides statutory audit in india in a convenient manner. She is a professional writer and loves to share Financial related topics.