One of the most important aspects of a transaction involving the sale of a business entity is the financial and legal due diligence. Investors want to make sure that the asset they are acquiring is free of legal encumbrances and will help them increase their revenue. Due diligence for sale of business is carried out by both sides to ensure that the deal remains profitable for everyone involved. It includes investigating the entity thoroughly to identify potential hurdles in closing the transaction successfully. Multinational enterprises acquiring an asset in a fast-growing market hire agencies such as top due diligence firms in India to conduct the process efficiently. A guide to due diligence is being presented here for people looking to sell their business.
What Is Due Diligence?
Due diligence is the name given to the process used to investigate the financial, legal, and other records of a company before its possible sale. The process helps buyers in assessing the accuracy of the sellers’ claims about the condition of their enterprise. It is an extensive investigation which gives a fair idea about the advantages, liabilities, and risks associated with the transaction. Each aspect of the business including its financial management, cash flow, assets, organizational structure, and human resources is scrutinized by experts to assess the profitability of the deal. Due diligence for investors is one of the most important activities before the actual sale and owners of target companies must be prepared for it in order to successfully realize the transaction.
What Information Must Be Provided By A Seller?
A seller must be prepared to give all details about the business to the purchaser. An owner readily providing all information will be considered as a credible person by the investor. Let’s take a look at the types of information that owners of a target business can be asked for:
1. Financial And Tax Documents
An acquirer will want to access financial statements, balance sheets, and cash flow statements apart from loan or credit agreements undertaken by the organization. Additionally, details about local and foreign tax returns will also be asked of the seller. Information regarding the taxation of real estate assets and defaults on any loan or tax liabilities must also be furnished.
A prospective investor will want to know about the manner in which operations are run at the business. A list of all products or services, business processes vendors, and distributors along with the software solutions being used at the organization must be prepared.
3. Organizational Charts
Organizational charts showing the hierarchy of the various positions at the enterprise and the relationships of relative ranks along with the total headcount must be provided to a buyer.
4. Assets Including Intellectual Property
An inventory of all movable and immovable assets of the company including real estate, machinery, vehicles, and their ownership documents must be compiled. The intellectual property assets along with their licenses or registration details must also be included in this list.
5. Legal And Regulatory Matters
Listing of all permits and licenses apart from information about any litigation (prior or continuing) that can have a bearing on business operations is also required.
6. Human Resources
Complete details about employees and their compensation including wages, bonus, benefits along with the documented human resources policy of the company must be given to a prospective buyer.
7. Marketing Information
An investor will be interested in learning about major competitors, market research and the company’s current advertising campaigns and overall budget for the initiative.
8. Customer Data
A list of major clients or the details of the customer base of the company must also be provided to a potential acquirer.
What Are The Preparations That Must Be Made By A Seller?
It will be pertinent if the owners are prepared in advance for due diligence for sale of business. A few tips in this regard will be helpful
1. Build A Team For The Process
Owners of target companies must build a team for the purpose which must include their business advisor, chartered accountant, lawyer, and an appraiser. These individuals will help the seller in compiling necessary information as well as identifying any potential problems.
2. Create A Digital Due Diligence Folder
Once all the vital information has been collected it must be stored in a digital folder. A cloud-based service can be used for this purpose but the reliability of the service must be ensured before signing up for it.
3. Get A Business Valuation Done
In order to avoid any conflict over the valuation of the interface, sellers must get their own assessment done. This will be helpful in getting an accurate idea of the final value and also in finalizing an appropriate approach for negotiations.
What Can A Seller Expect During The Process?
Target business owners must also know what a buyer is expected to do during the procedure.
1. Buyer Interacting With Clients And Suppliers
An acquirer will interact with major clients and suppliers to assess the products or services and also to understand the nature of the relationship between the seller and the two entities.
2. Comparison Of Provided Information With Actual Records
A potential buyer will compare the information provided by the seller with the actual records to establish the authenticity of owner’s claims.
3. Investigation Into Business History And Trends
It is normal to expect investors to look at the earned revenue, profit margins, sales targets, and other figures to see whether a consistent trend can be established or not.
Making adequate preparations fordue diligence for sale of business will be beneficial for a seller as it will minimize the scope for the emergence of issues and help in smooth and quick realization of the transaction.