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When you’re ready to sell your business, your aim is to receive the best and highest offer, reflecting the time and efforts you have spent building it. But then comes the due diligence process, with its incomplete documentation and unexpected issues to tackle—it can be a lot to handle.

Since due diligence is used to evaluate an M&A transaction, let’s first define M&A:

Mergers and acquisitions, or M&A, is the umbrella term for business combinations. It encompasses various transactions, the most common being acquisitions. In an acquisition, a company purchases another company, usually absorbing its assets and ownership.

A recent article showed that some of the biggest M&A failures happened as a result of neglecting, or not investing enough time into the due diligence process. Missing financial records, legal documents, and lack of key performance indicators (KPIs), to name a few, can really slow down the due diligence process, and ultimately, the transaction closing.

In this guide, we’ll review the crucial role of due diligence, its key stages, the documents you’ll need, and common issues that may occur during the process.

Understanding Due Diligence

While virtually all buyers see the due diligence process as an important step during the M&A evaluation stage, sellers might see it as an intrusive inspection. Understanding what it’s all about can help sellers handle the sale process more effectively.

So, what is due diligence?

Due Diligence is when a potential buyer evaluates a company that they are interested in investing in, or acquiring. They look closely at the company’s finances, legal matters, operations, human resources, technology, market position, and more.

For sellers, the primary goal of due diligence is to show off the value and potential of their business. By providing detailed information, they build trust with potential buyers, maximizing their company’s valuation, and ensure a smooth sale.

Key Stages of Due Diligence

Now that you have a basic understanding of what the due diligence process is about, let’s break down the key stages involved in it:

1. Preparation. Every due diligence process should start with thorough preparation. Get your management team together and include your financial advisors and legal counsel. They’ll help you gather and organize the necessary information likely to be requested by a potential buyer. Having a detailed checklist of the various requirements also helps. It ensures that you are well-prepared and capable of addressing most, if not all, potential buyer inquiries.
2. Conducting Due Diligence. This is when the buyer’s team does an in-depth review of your company through the information you provide. Key activities may include: 
   1. Financial Review: They will look into your company’s financial records such as balance sheets, income statements, and cash flow statements.
   2. Legal Review: They will review your company’s contracts, licenses, permits, litigations, and compliance with other regulations.
   3. Operational Review: They will look at your company’s operations, including supply chain, production processes, management structure, and key performance indicators.
   4. Commercial Review:  They will analyze your company’s market position, considering factors such as competitive landscape, market share, customer demographics, and industry trends.
3. Risk Assessment. After conducting the due diligence, the buyer will study their findings. They may spot potential risks for the transaction, so you should anticipate potential risks and be prepared to address them.
4. Reporting and Analysis. Finally, they’ll compile all findings into a detailed report. You may not have access to the buyer’s final report, but they will likely discuss it with you. You must carefully review their findings and sort out any concerns for a favorable outcome.

Importance of Due Diligence

Conducting a pre-sale internal due diligence can help you anticipate and tackle potential issues early on by filling in the gaps you find ahead of the formal due-diligence process. By addressing issues prior to the formal due diligence, and being transparent about strengths and risks, you can increase your business’s valuation and negotiation power. Being open during due diligence builds trust with buyers, reduces surprises after the sale, and strengthens your relationship with them.

To access a comprehensive checklist of documents needed in the due diligence process, download our detailed guide now. This guide outlines the essential documents that potential buyers typically look for when evaluating a business for acquisition, helping you prepare thoroughly for the sale process.

Leveraging Professional Advisory Services to Increase Valuation

Getting through the due diligence process is simpler with the help of professional advisory services, such as the internal due diligence services provided by NYC Advisors, LLC. NYC Advisors performs internal due diligence for various types of companies, as well as interfaces between buyers and sellers during the due diligence process.

For example, NYC Advisors was engaged to perform an internal due diligence for a provider of accounting services to long-term care facilities, and then interfaced between the buyer and seller during the buyer’s due diligence process. Below are the main steps of this engagement:

1. Performed internal due diligence and created a gap list.
2. Managed the conversion of the seller’s accounting method from Cash to Accruals and oversaw the company’s first annual audit by an independent CPA firm.
3. Worked with Seller’s legal counsel and managed the creation of service agreements and all other legal documents needed for customer and supplier relationships.
4. Reviewed and updated the HR manual.
5. Hired an outside firm to perform data center audit and correct all major issues found through the audit.
6. Interfaced with landlords of all company’s locations to update the company’s leases.
7. Interfaced with the seller’s M&A advisors to provide and explain all due-diligence information.
8. Worked with the Seller’s corporate attorneys to negotiate the transaction’s terms & conditions, and to close the sale to an ESOP.

As a result of the internal due diligence work done by NYC Advisors and the seller, the company was sold at a much higher valuation than initially provided by a valuation advisor. This successful outcome highlights how thorough preparation and expert guidance can significantly influence a business sale.

NYC Advisors, LLC can assist your business to prepare for a sale or a merger, ensuring that you have all the necessary information to present to prospective buyers. This includes performing internal due diligence before a sale and preparing the information that the prospective buyer requests during the formal due diligence phase.

In need of due diligence assistance? Reach out to us!