The process of selling a company is a complex and multi-faceted endeavour that requires meticulous planning and execution. One critical phase in this journey is the due diligence process, during which potential buyers scrutinise every aspect of the business. To ensure that the value built over the years is retained during a company sale, strategic considerations and proactive measures must be taken during due diligence.
What is “due diligence”?
Due diligence is a comprehensive examination of a company’s financial, operational, legal, and strategic aspects. Buyers conduct due diligence to assess the risks and opportunities associated with the acquisition, making it crucial for sellers to actively manage this process. Retaining value in a company sale involves addressing potential red flags, showcasing strengths, and positioning the business as a valuable and stable investment.
In order to ensure a smooth process it is best to be prepared. Indeed, the fact that you are prepared will in itself demonstrate that your business is well run and enhance a buyers view of it.
Documentation
One of the key elements in a successful due diligence process is having organised and thorough documentation. Sellers should proactively compile essential documents related to financial statements, contracts, intellectual property, regulatory compliance, and
any potential legal issues.
This not only expedites the due diligence process but also presents the company in a positive light, instilling confidence
in potential buyers.
Financial transparency
Financial transparency is paramount during due diligence. You will be expected to provide detailed financial analysis and projections as well as tax details. Although it is, of course, great to demonstrate consistent and healthy financial performance, it is not always possible. But you should at the very least be able to answer a comprehensive deep dive into your financial records, along with a clear understanding of financial drivers. Doing so can significantly enhances the perceived value of the company.
This transparency builds trust and confidence in you which in turn increases the likelihood of a successful sale.
Risk mitigation
Identifying and addressing potential risks upfront is crucial in retaining value during a company sale. As a seller you should understand key risks before entering into negotiations, addressing issues such as legal liabilities, pending litigation, and compliance concerns.
In recent years one of the biggest issues that we have seen is the use of tax mitigation schemes, that bar none, have all been unwound as part of the sales process. Proactively addressing these issues demonstrates a commitment to transparency and risk management, minimising the chances of surprises that could derail the sale.
Intellectual property protection
For many companies, intellectual property (IP) is a significant driver of value. During due diligence, buyers often scrutinise the ownership, protection, and value of intellectual assets. You must ensure that all IP is properly docu-mented, registered, and safeguarded if it is going to form a significant part of the value of your business.
Employee relations and key personnel
The value of a company is closely tied to its human capital. During due diligence, potential buyers assess the quality of employee relations, talent retention, and the stability of key personnel.
By proactively addressing these aspects via showcasing a positive company culture, employee satisfaction initiatives, and succession plans, you can make buyers comfortable that after you have received a big payday, their investment remains safe. However, be careful as to when you let employees know about a process as this could well unsettle them and derail the sale. If in doubt, wait until the ink is dry on the sale documents!
Customer and supplier relationships
Maintaining strong relationships with customers and suppliers is integral to a company’s value. Sellers should be prepared to provide information on customer contracts, satisfaction levels, and retention strategies. Similarly, the stability of supplier relationships and any associated risks should be addressed. A well-managed network of customer and supplier relationships enhances the perceived stability and sustainability of the business.
Successfully retaining value through a deal process requires a proactive and mostly collaborative approach during the due diligence process. By focusing on documentation, financial transparency, risk mitigation, intellectual property protection, employee relations, and customer/supplier relationships, you can demonstrate that your business is an attractive investment.
This not only maximises the value retained during the sale but also fosters a positive and collaborative relationship between buyers and sellers. In navigating the intricate landscape of due diligence, proactive preparation and a commitment to transparency are the keys to a successful and value-maximising company sale.
Michael Pay is co-founder of EMC Corporate Finance
www.emcltd.co.uk
