How to Prepare Your Company for Due Diligence
When you’re an entrepreneur, there are different scenarios where you might be facing due diligence. It can be important that the process goes well, particularly if it’s for a merger or an acquisition.
It can also be overwhelming, particularly since your business is going to face extreme scrutiny, and the outcome can have a huge impact on your life.
Some parties will go as far as hiring a top private investigator in NYC or other areas of the country as part of due diligence, making it an even more intimidating experience.
So, what can you do to prepare proactively?
The following are tips to prepare your company and yourself for due diligence.
Understand the Importance of Due Diligence
First and foremost, to prepare the company that you head up for due diligence, you need to know why it’s important and you need to convey that to key employees. With due diligence, the individual or organization considering buying your business does not only a full financial investigation but also a legal and business investigation, thus the reason private investigators might be hired.
With a business deal or transaction, due diligence is vital. Otherwise, the deal might not go through,so it’s better to be prepared ahead of time to ensure a smooth transaction.
What Does Due Diligence Entail?
Prospective buyers will ask for certain information. As a business owner and entrepreneur, what you can do is collect that information in advance. The specific things needed may vary depending on your business and the buyer, but generally, bring together the following:
- Information about your business, including any operating agreements you may have, agreements with owners of equity interests, equity certificates, board minutes,and ledgers.
- Financial records which include your annual reports, audit reports, balance sheets, and income statements.
- Material contracts that may be inplace.
- Information about your employees, including their wages, benefits, bonuses, and information about sick and leave time policies.
- Intellectual property.
Along with the things you might typically think of as being part of due diligence, which areprimarily the ones named above, you’re also going to want to think outside the box. For example, gather your marketing materials to show to a possible buyer.
Having your marketing information ready can be the make or break element in a possible M&A deal.
You’ll want to include a list of your primary competitors, market research reports, and schedules of your current campaigns.
Another area you might want to focus on is your general day-to-day operations. You want to be able to clearly outline the steps in your day-to-day business operations and your processes. This can also include information about your customers and your organizational charts.
The Earliest Steps
Beyond understanding the importance of due diligence and having a general idea of what will be needed and what you should compile, the following are some other things you should do well in advance of preparing to sell your business.
- Create a team of professionals including your lawyer, an appraiser, a CPA and if necessary a broker. Working with professionals who have gone through due diligence before is going to make the experience much easier, even though it may cost more. It can prevent costly mistakes down the line, however.
- Get a business valuation. The business valuation process can be lengthy, and last several months so go ahead and get a head start.
- Work on cleaning up your accounting. You’ll likely show someone who wants to acquire your business anywhere from two to three years of financial information. If you can show audited financials, it may make it more likely the deal will go through.
Set Up a Virtual Data Room
Setting up a virtual data room is another place you can get a head start before you even start working with any potential buyers.
A virtual data room is where you can securely and efficiently put all of the information a potential buyer will need access to. There are companies that set-up secure data rooms specifically for mergers and acquisitions,and that way you don’t have to worry about information being all over the place, which poses a potential security risk.
Finally, once you’ve gathered everything you’ll need, and you have an understanding of what goes into due diligence, you can get organized.
Being prepared and organized will help you see things from the perspective of a potential buyer, therefore anticipating any issues that might arise so you can deal with them before a buyer sees them.