DUE DILIGENCE-What does it really mean for you and your business?

Due Diligence--Research or analysis of a company or organization in preparation for a business transaction as a corporate merger or purchase of securities.-Merriam Webster 

Most people have heard of the term due diligence and believe they have a good understanding of the term.  But we want to discuss today the realities of the due diligence process and how it can affect the sale of your business or your client's business.

"Kicking the tires" is a term that derives from buying a used car and it is a useful analogy here.  A buyer is assessing the condition of the property before buying it--but not just the tires.  He is going to check the engine, the transmission, the external condition of the car and so on.  All the while, he is looking for rational reasons to lower the price the seller is asking.

Once he has found all the problems with the car, he starts negotiating with the seller--$200 less because of that dent, $500 less because it needs new tires, $300 less because it needs new brakes.....

In the sale of a business the process is more genteel, more subtle.  The buyer signs a Letter of Intent and agrees to a price and terms, pending the outcome of due diligence.  This phase of the sale is intended to determine that all the information provided by the seller is true and verifiable.  As it uncovers facts  about the business which haven't been disclosed-it is an opportunity for the buyer to renegotiate the price and terms of the sale in his favor.

Roughly 85% of all business owners do no pre-transition planning.  They simply wake up one day wanting (or needing) to sell their company.  Or they get an unsolicited inquiry on the phone or by mail or fax and they're just in the mood to listen.   Not being prepared for the due diligence process can cost the seller millions of dollars in reduced deal value. 

By doing Exit Planning in advance of any transition, you and your business are ready for a sale whether planned or not.  A careful review of all aspects of your business from the financial statements, to the management team, to the inventory and everything in between, will enable you to see the impediments to the value of your business.  This will allow you the time to study the problems, analyze the solutions and implement the fix. 

With just a little planning, you will be able to enjoy the short term results of a business running more smoothly and profitably and the long term result of more money in your pocket when it comes time to sell.