Rasmussen’s 9th Top Tip – Conduct Pre Sale Due Diligence
In this the 9th Top Tip to consider when selling your business, Richard Rasmussen details the importance of conducting pre-sale due diligence.
Due diligence is defined as “an inspection of your business records carried out by a potential buyer to ensure the business is viable and the information provided is accurate”. It’s what happens as part of the sales process. The amount of due diligence conducted by the purchaser and their advisors differs greatly, so it’s best to be prepared.
So, you may ask, why is it important for the vendor to do “pre-sale” due diligence, even before the business is put on the market?
The answer is really about presenting the business in the best possible light, where a potential buyer can hopefully identify no, or minimal “areas of concern” – So, conducting pre-sale due diligence allows the opportunity to rectify any of these potential issues in a timely manner.
It also, once the issues are rectified, allows the vendor to present a professional sales document that shows the business is worth investing in. Everything is detailed as it should be, it’s factual, and there is no room for misinterpretation.
By presenting a business in such a way, the potential purchaser, and his advisors have enhanced confidence that the business is well run and they know what they are buying.
If you put yourself in the purchaser’s position, and they find all sorts of anomalies, misrepresentations and potential issues in the business, how do you think that will affect their perception of value and business quality? The answer is negatively. Certain issues, disclosed and non-disclosed, can be show stoppers.
So, listed below are some of the common issues we find in pre sale due diligence:
- Financials are poorly portrayed and out of date
- There is unnecessary complexity in the balance sheet
- Some expenses in the P&L are hard to identify as personal – i.e. cars, phones, computers, overpayment to related parties
- The depreciation schedule is out of date or incomplete – i.e. cars that were sold years ago appear. The new piece of equipment is not shown
- Outstanding tax debts
- There are no options to extend the lease on the building
- You haven’t registered a trading name
- OH&S is out of date / non existent
- Staff position descriptions are not in place / out of date
- Software may not be all licensed
- Promotional media, such as the web site is out of date
- No business plans / budgets / forecasts / sales plans / cash flow projections
- Complex supplier arrangements, which are hard to undo
- Contractual disputes with customers, suppliers, and other parties
- Systems are not in place and or not documented
- Bad debts reflecting poorly on the business / debtor days are high
- Suppliers are being strung out
- Business is too reliant on a few customers, customers show little loyalty
- Business does not meet safety and or some licensing requirements
- There are skeletons in the closet – eg. outstanding legal dispute, work cover claim, unidentified loss of a major client
This is not an exhaustive list, it serves only to highlight some of potential issues that can arise, and that may be able to be addressed prior to putting the business on the market. The idea is to be able work on / eliminate these to enable the business to be presented in the best possible light, where the buyer sees the business as viable, one where he / she can be confident of being able to take it over and make a success of, or can easily make it fit into their existing business.
In general terms if you can implement measures to mitigate or eliminate possible risks, you will achieve a better price for the business.
Again, start early, as some issues will take time to eliminate or make good. If you think this is a recurring theme of the preceding 8 tips, it is. Starting early in the lead up to selling a business is vital. Having the business appraised early will also help identify some of the issues that may occur in due diligence. Many of these potential issues can be addressed, and it’s far better done before the business is placed on the market. It can have a major effect on the selling price, terms, the time it takes to sell, and whether you are actually able to achieve a sale.
Ascent Partners helps vendors prepare transition plans and acts as sales agents to sell printing related businesses around Australia. Contact Richard Rasmussen on 0402 021 101 for a confidential discussion or visit www.ascentpartners.com.au