Buyer & Investor Preparation

​

Effective Due Diligence Preparation

​

Preparing your company to be scrutinized by prospective buyers is a difficult but critical step that you should begin prior to the sale of your business.  When the due-diligence process runs smoothly with few hidden surprises, it can lead to a faster and more stress-free close. Unfortunately, many business owners do not spend time preparing for this critical step, and many deals fall apart during this phase of the negotiations.

​

Gideon Liberty estimates that up to 70% of all deals fall out during the due-diligence stage. This statistic speaks to how difficult it can be to close a middle-market deal.   Based ongideon liberty’s two decades of experience, here are a few steps to consider to prepare for due diligence.

​

Recast-your-financials. 
Recasting allows you to show potential buyers the true profitability of your business. It’s common knowledge that the IRS allows you to legally reduce your taxable income. Recasting allows you to reflect the true profitability of your organization by removing any non-business related or owner-related perks and expenses. Recasting is vital for two reasons: in most cases, it allows you to obtain a higher value for your company, and it ensures that no deal-breaking financial issues arise during due diligence. Recasting is a recognized GAAP (Generally Accepted Accounting Principle) and is a vital step in preparing your company for sale. Seek the assistance of an outside professional to recast your financials – an objective viewpoint is essential to creating a reliable picture of your business for potential buyers.

​

Conduct-a-profitability-comparison.  
Once your financials have been recast, be sure to analyze your profitability in relation to industry norms. Ratio analysis can quickly point out areas that need financial scrutiny.   Potential buyers will conduct this level of analysis, and if you haven’t, you may be caught off guard by key questions during due diligence. This exercise is also valuable to help you determine the areas of the business that need your attention in order to improve your profitability. Financial ratios can be obtained from industry associations, as well as specialists in this area, such as the Risk Management Association. 

 

Conduct-an-operational-review.
Ask yourself: What are the key areas of my business that I would like to improve? Chances are very good that if there are areas that you believe need improving, a potential buyer will agree. It is far better to have analyzed these issues and have initiated strategies for improving them, then to wait for a buyer to bring them up. Also, be prepared to disclose any operational issues that you are unable to address prior to due diligence. It is better to identify these items as “areas of potential improvement,” then waiting to be asked during the due-diligence process.

​

Conduct-an-organizational-audit.  
Buyers will typically want to know how dependent the business is on you. Assuming you will be eventually no longer involved in the day-to-day operation of the business, buyers want to determine if you have a management team in place. Who have you groomed to replace yourself? How many family members are involved in the daily operation of the business, and how many are interested in staying? Conducting this audit before due diligence begins can help you prepare for these inevitable questions. 

 

Evaluate-company-intangibles.  
Buyers will typically focus on “traditional” due-diligence items, such as those outlined above. You should, too. However, in addition, be sure to conduct your own internal intangible “value-building” due diligence. This type of due diligence ensures that the buyer realizes your organization’s hidden, non-balance-sheet value, such as promising market possibilities, market voids that your service/product fulfills, brand equity, growth opportunities and expansion with additional capital. By analyzing these intangibles as part of your internal due-diligence process, you will help communicate opportunities in your business to the buyer.

​

Gideon Liberty has been helping companies prepare for sale for more than 20 years.  If you would like to learn more about the due-diligence process, Gideon Liberty holds online Lunch-&-Learn-Webinar that cover all aspects of selling a privately held business. Please contact us at 800-000-0000 to make a reservation for an upcoming workshop or visit gideonliberty.com to learn more.