Why Due Diligence Matters When Selling a Business

Pummeled by the recession, many small business owners should be permitted an enormous sigh of relief as they watch the value of their small businesses growing. According to the National Federation of Independent Business, America’s small businesses are more confident than they have been in more than three years, and are projecting both sales growth and job creation. The reviving health of small companies across the country will no doubt have more owner-managers considering a sale in the near future.

The improved outlook for small companies has not escaped the notice of private equity firms and large companies looking to invest during this period, each with record amounts of available capital to deploy at a time when there is a limited supply of deal opportunities. Consequently, you may find suitors interested in your business are not in short supply.

However, even with queues of prospective buyers lining up, owner-managers still need to stay on the ball in order to optimize their exit. The scrutiny a business is placed under during the due diligence phase of an acquisition has increased fundamentally since the financial crisis. Financial analysis and inquiries into the business are made through the view of the investor, and generally look at trends and issues that are not contemplated in the day-to-day operations of your business. Not only can this lead to a reduction in the value the prospective buyer places on the business, it can also expose issues that require structural changes to the deal or draw out the sale process, leaving your business itself in limbo.

Some small businesses and their advisors are realizing that by commissioning a due diligence project before taking the company to market, they can dramatically enhance the terms of the sale and ensure they reap the full benefits of the blood, sweat and tears they put into building the business.

If you are looking to sell your business, bringing in an additional team member with financial, tax and operational expertise to execute the analysis can increase the speed to close, the certainty of close and the final valuation at the closing table. If issues that will impinge upon a sale are discovered, you then have the chance to initiate strategies to remedy them before presenting your business for sale.

Performing your own due diligence in advance of a sale provides the framework for definable and defendable positions on any issue, allowing the sell-side team to optimize the valuation when approaching the negotiating table.

The use of this technique is increasing rapidly in the U.S. but, understandably, some small business owners seeking an exit are hesitant about incurring additional costs prior to a sale. It is worth bearing in mind that sell-side due diligence consistently demonstrates a high return on investment and allows the owners to maximize the final price at close, improve the efficiency of the sale process and reduce the potential for a broken deal.

Regardless of how many buyers there are, you can only sell the business once, so it is well worth using sell-side due diligence in order to ensure a smooth sale process and a desirable end result.

Steven E. Brady is National Managing Partner, Transaction Advisory Services, Grant Thornton LLP.