SELLER EXIT PREPARATION
The due diligence process for selling a business is a comprehensive review that verifies the company’s operations, finances, legal standing, and overall health. This process ensures that potential buyers know what they’re purchasing and allows sellers to maximize the purchase price and terms. Seller exit preparation should include the following:
- Seller Documentation
- Gather Documentation – Organize key documents, such as financial statements, tax returns, legal agreements, intellectual property records, and employee contracts.
- Organize Financial Records – Ensure financial records are up-to-date, accurate, and properly categorized. Buyers typically request records covering at least 3-5 prior years.
- Identify Key Risks – Proactively address any potential risks or concerns, such as pending litigation, customer concentration issues, or regulatory concerns.
- Develop a Non-disclosure Agreement (NDA) – This protects sensitive information, as buyers need to sign an NDA before gaining access to private information.
- Financial Due Diligence
- Review Financial Statements – Verify income statements and supporting documentation.
- Analyze Revenue and Profit Trends – Evaluate sales and earnings over time to ensure they align with the buyer’s expectation and industry standards.
- Check for Debts and Liabilities – Ensure all debts, liabilities, and accounts payable are accurately documented.
- Assess Cash Flow Stability – Confirm that the business has healthy cash flow and can sustain operations without excessive financial support.
- Legal Due Diligence
- Verify Ownership and Intellectual Property (IP) – Confirm that all assets, trademarks, patents, copyrights, and IP are fully owned by the seller and not under dispute.
- Review Contracts and Agreements – Examine any customer and vendor contracts, employee agreements, leases, and other significant legal documents.
- Check Compliance with Laws and Regulations – Ensure the business complies with relevant local, state, and federal laws and has no outstanding compliance issues.
- Identify Pending Litigation or Claims – Disclose any ongoing or potential legal disputes, as buyers will want to know the risk exposure.
- Operational Due Diligence
- Analyze Key Business Process – Review critical business processes, such as production, inventory management, and supply chain efficiency.
- Evaluate Key Personnel and Roles – Assess the team, especially key employees whose retention may be crucial to the business’s success post-sale.
- Review Customer and Vendor Relationships – Ensure stable and beneficial relationships with customers and suppliers. Look for dependency on single customers or vendors that might pose risks.
- Assess Technology and Infrastructure – Verify that technology, systems, and equipment are up-to-date, properly maintained, and sufficient for business operations.
- Environmental and Regulatory Due Diligence
- Confirm Environmental Compliance – For businesses with potential environmental impacts, verify that they meet all regulatory standards.
- Industry Specific Regulations –Ensure the business complies with specific industry standards or certifications, as failing to do so could lead to penalties or disruptions.
- Tax and Insurance Due Diligence
- Review Tax Compliance – Examine past tax returns, current tax obligations, and any disputes or audits from tax authorities.
- Verify Insurance Coverage – Confirm that the business has adequate insurance coverage for liabilities, property, employees, and any unique industry risks.
- Human Resources and Benefits Due Diligence
- Assess Employee Agreements – Review employment contracts, especially for key personnel and executive staff.
- Review Benefits and Compensation – Examine employee benefits, compensation structures, retirement plans, and any potential liabilities related to benefits.
- Identify Employee Risks – Confirm any issues with employee turnover, satisfaction, or union-related concerns.
- Hire an Investment Bank (IB)
- Summarize all findings that highlights the business’s strengths, weaknesses, and any risk factors.
- Find the right IB for your sale.