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Value Creation Blog

Mock Due Diligence Is A Good Step For Exit Planning

Posted by Josh Patrick

due diligence in salesIf you’re thinking about selling your business you might want to consider putting your company through a mock due diligence process.

If you’re thinking about selling your business you should know how a buyer would look at what you’ve built.  Buyers will be looking for ways to degrade their offer once the sales process is started.  Due diligence is one of their favorite ways of doing this.

Here are some things you might learn if you take the time for a mock due diligence process:

You might learn your business isn’t buttoned down.  In a due diligence process a buyer will ask you for all of your legal documents.  They’ll want to see contracts with suppliers and customers.  They’ll want to know what sort of agreements you have with your employees.  They’ll want to know places they could have problems once they take over your business.

Going through a due diligence process will help you learn what you should do before you accept that offer from potential buyer.  You will learn what you need to do from a contractual point of view before you start the sales process.

You might learn that you don’t know that much about your own business processes.  The more documentation you have of your business processes the stronger case you can make for a large offer from a potential buyer. 

Buyers often depend on sellers having poorly documented sales and operational processes.  This helps the buyer lower their offer to you because you haven’t taken the time to write down what you do and how you do it.  You can’t afford to keep this information in your head if you want a strong offer when you sell your company.

You might learn that you’re way too involved in your business.  Buyers are interested in your business, they’re interested in your systems, and they’re interested in your customers.  They’re likely not very interested in you.

The more that you do to take yourself out of the day-to-day operations of your business the stronger case you’ll be making for getting a good offer that you’re willing to accept when you sell your business.

You might learn that you don’t have the type of sales a buyer wants to buy.  If your business has sales that go up and down, or your sales happen from a customer once, your business isn’t very attractive to a buyer.  Buyers want to have sales that repeat on a consistent basis.  If you’re sales come in ways you can’t document you will see your offer lowered.

This doesn’t mean that you can’t get a strong offer for your business if you don’t have regular repeatable sales.  As long as you have a system for creating sales and over the course of a year that is predictable you can defend your business as a good acquisition target.  It’s just that I often see businesses with lumpy sales have done a poor job of documenting how they create sales.

The entire due diligence process is a difficult process at best.  If you understand what’s going to happen before it starts you’ll likely be prepared for what comes down the pike.  Going through a mock process well before you start to market your business will allow you to understand what will happen and fix any glaring problems before you put your business up for sale.

Josh Patrick

We have an analysis tool you might be interested in.  We have eighteen areas that help create value in your business.  These eighteen areas just happen to be what buyers also look at when the buy a business.  Click on the link below to set a time to speak with me about your own business and we’ll send you a complementary analysis of your attractiveness as an ongoing entity and potential seller.  (Or just give us a call at 802-846-1264 to set a time)

https://my.timedriver.com/TZMSM

Securities and Investment Advisory Services offered through NFP Securities, Inc. (NFPSI), Member FINRA/SIPC. Stage 2 Planning Partners and NFPSI are not affiliated.

This article is published for residents of the United States only.  Registered Representatives and Investment Adviser Representatives of NFP Securities, Inc. may only conduct business with residents of the states and jurisdictions in which they are properly registered.  Therefore, a response to a request for information may be delayed.  Not all of the products and services referenced on this site are available in every state and through every representative or advisor listed.

Topics: for business owners, exit planning, business exit planning, selling, due diligence

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