Selling Your Business? You Might Benefit From Presale Financial Due Diligence

If you’re contemplating a sale of your business, you probably know that any serious buyer will scrutinize your financial statements, operations, assets and legal agreements. Conducting your own due diligence now can smooth the buyer review process and ease deal negotiations. Working with financial and legal advisors, you’ll have the opportunity to fix any problems before your business goes on the market.

Anticipate buyer scrutiny

The primary goal of presale due diligence is to evaluate the quality and sustainability of earnings, identify risks, and normalize financial results before giving prospective buyers access to the company’s books. Financial advisors look for anything that could be considered negative or inconsistent by a prospective buyer and, thus, potentially cause the buyer to reduce the offering price — or even terminate the deal.

Presale due diligence generally focuses on financial performance, tax exposure and other matters that buyers might scrutinize. So, your financial advisor may:

• Analyze the last three years of financial statements to assess revenue recognition policies, margin trends and earnings before interest, taxes, depreciation and amortization (EBITDA),
• Evaluate inventory accounting methods, costing practices and obsolescence risks,
• Look for any “off-balance-sheet” liabilities,
• Assess compliance with federal and state regulations, such as those related to environmental protection and employee-related taxes,
• Review customer and vendor concentrations, related-party transactions, and key contracts,
• Evaluate the strength of confidentiality and nondisclosure agreements, and internal control policies, and
• Identify any outstanding lawsuits.

Addressing these issues now can reduce seller and buyer uncertainty later.

Evaluating IP issues

Presale due diligence also may require your attorney to assess ownership of key intellectual property (IP) such as patents, trademarks, logos and proprietary software. And your financial advisor may review IP documentation to identify gaps or inconsistencies that could affect asset values.

Such verification is critical to a company’s value, especially in industries such as technology, pharmaceuticals and manufacturing. If, say, your business has only a tenuous claim on an internally developed product, it’s better to learn — and possibly fix — this before a prospective buyer finds out.

Start early

The earlier you start planning and preparing for a sale, the better. Ideally, you should engage a professional with merger and acquisition experience to perform presale due diligence on your business at least six months before going to market. If you’d like to make major changes before selling, such as divesting noncore operations or significantly reducing your company’s debt, give yourself even more time. Contact us with questions.

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