Conducting due diligence on potential buyers

Generally, we perhaps tend to think of due diligence in the M&A process as being conducted on the buyer’s side, as they look into the business they are considering making a major investment in to ensure there are no hidden snags.

However, due diligence is also important from a seller’s perspective in order to help find the right buyer. Seller’s due diligence is not just crucial for a successful sale, it can also be vital to helping the business continue to be successful post-sale.

Here are some of the key things to consider when conducting due diligence while selling your business.

Do they have the financing in place?
Perhaps the most obvious point, does the buyer have the financial capacity to buy your business? Whether they are planning to finance it from their own capital or through funding from an outside source, making sure that finance is there is of course paramount.

It may sound too obvious a point to even list here, but making this the first question you look into when assessing potential buyers will help you avoid being drawn into the initial stages of negotiations that ultimately turn out to be a totally pointless waste of time.

Legal standing
Does the buyer have any legal issues that could (or should) exclude them from acquiring or owning your business? These could be general things (such as, say, a criminal record, a past or ongoing legal case) or perhaps something specific to the sector your business in (such as previous professional legal problems or exclusions).

As with a buyer’s financing, these are obligatory things to look into that you’ll want to get done at the start of any due diligence process to quickly exclude buyers that are clearly totally unsuitable.

From there, depending on your sector, you may also need to determine whether a potential buyer has credentials such as the necessary licenses required to own or operate a business in your specific market.

Don’t rely on a third-party process
In a business acquisition, many buyers will turn to outside financing to fund their takeover. In this scenario, the lender, whether that’s a bank or some other outside investor, will perform their own thorough due diligence to ensure that it’s safe to lend to the prospective buyer.

Lenders, though, will have different due diligence requirements to someone selling their business and sellers will need to make sure of criteria that lenders perhaps won’t check. For that reason, it essentially goes without saying that a seller shouldn’t assume a potential buyer is totally reliable just because they have managed to secure the funding for the transaction.

Are they right for the business?
Once the financial and legal matters have been resolved it will, of course, be important to determine whether the buyer is right for your business from a professional point of view. If this hasn’t already been covered at the legal stage, it will be crucial to gauge the prospective buyer’s experience in your sector and whether they have the professional credentials to successfully run a business like yours.

It is also advisable to look thoroughly at what the buyer’s plans are for your business post-sale. Do they have a well thought out plan in place at all? And, if so, how realistic or rational is it? What changes do they plan to make and do you think these would be right for your business?

These are of course important questions if you are passing on a business that you are still going to have a stake in going forward, or that you will just retain a strong emotional connection to. But even if you just plan to sell and then move on, it is entirely possible that your earnings from the sale will be linked to the business’ profits going forward and, for that reason, knowing the buyer’s plans for the business will be important.

What is their character like?
Before settling on a buyer, it is advisable to get an idea of their character and whether or not that will fit with your business. If possible, talk to current or former partners or employees, for instance, to get an idea of how they work and how they are to work with.

This may sound like a relatively small issue compared to the big financial and legal considerations, but it will be vitally important in helping to ensure that the post-deal integration is smooth and that the business is in good hands going forward.

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