Selling a business: An A-Z guide to due diligence

Due diligence isn't another tick-box activity. It's essential to selling a business and can form the very foundations of a deal. A business' value can hinge on the quality and depth of due diligence carried out pre-sale.

That being said, if you haven’t done it before you’re likely to not know what due diligence even entails.

By its very nature due diligence encompasses almost every aspect of a business. Chris Hird breaks down essential due diligence considerations into an A-Z guide, making the process as easy as ABC.

When it comes to a business acquisition or exit, due diligence is the foundation of the deal. It includes business records, tax, employee contracts, management information, and IT. The list is so extensive that it’s hard for business owners to know what to consider in their own exit strategy or acquisition.

Why is due diligence so important ahead of a sale? And what should business owners be considering?

Due diligence ahead of sale

When it comes to exiting a business, many owners look at selling their business to a third party.

To get the best price for your business the due diligence process needs to be as smooth as it can be. A due diligence checklist will likely give you an idea of key changes you’ll need to make before putting your business up for sale. You can use this to improve your business’ due diligence.

An advisor will also be useful here. They will approach the situation from an objective point of view, probing essential questions which will drive your sale forwards.

A-Z due diligence terms for business owners

A

Audit: Take a deep dive into your financial records, documents and processes. This will ensure you have the big picture as well as all the details necessary to ensure accuracy and compliance with regulations.

B

Business culture: Ensure whoever buys your business is able to match your current culture. This will ensure a smoother transition for your current management and employees.

C

Customer Relationship Management (CRM): Make sure all your client data is up to date to ensure you have a true representation of your current client base. You should delete any clients who are no longer with your business.

D

Data: Make sure all the systems you use to store data are integrated for easier extraction. Data is a huge part of due diligence as it backs up every claim you make for your business.

E

Employee contracts: Review your employee contracts to ensure there are no discrepancies in pay or benefits offered.

F

Filing history: Carry out an audit of your historical accounts, tax returns, confirmation statements, and any HMRC enquiry letters. Your historical papers are just as important as your current. No business will go into a deal blind.

G

Governance: Review your corporate governance structures, policies and practices to ensure transparency, accountability and effectiveness.

H

Human resources: Evaluate your current organisational structure, benefits and compliance to ensure everything is above board.

I

IT and security: Look at your physical security measures, cybersecurity protocols, and data protection strategies to ensure everything is as safe as can be. Review your software contracts to determine whether they are up to date.

J

Joint venture analysis: Assess your risks, benefits, and terms associated with entering into a joint venture or partnership if this applies.

K

Know Your buyer: Know where to look for your buyer, and what your buyer is looking for.

L

Litigation, creditors and debtors: Examine your legal documents, contracts, litigation history, and regulatory compliance to identify potential legal risks or liabilities.

M

Market analysis: Evaluate market trends, competition, demand, and growth potential within a specific industry or market segment.

N

Negotiation: Discuss and negotiate with stakeholders to reach agreements on terms, conditions and responsibilities.

O

Operational review: Assess your business’ operational processes, systems, and efficiencies to identify opportunities for improvement and risk mitigation.

P

Property contracts: Review your property and lease agreements, and ensure there are no unresolved issues with your contracts. This will raise issues during the buying process with your potential buyer otherwise.

Q

Quality control: Evaluate your product and/or service quality standards, manufacturing processes, and customer satisfaction levels.

R

Regulatory compliance: Ensure you are adhering to laws, regulations, and industry standards relevant to your specific business operations by reviewing any changes in legislation.

S

Statutory records: Ensure your statutory records have been recorded accurately. These show the current and correct shareholders alongside records of past dividends.

T

Tax review: Examine your tax filings, liabilities, deductions, and compliance with tax laws and regulations. It's always best to consult an advisor who can ensure every requirement is being met efficiently.

U

User Experience (UX) Review: Review your company's digital products including your website to ensure you're meeting user needs and expectations. A website is a chance to create a great first impression of your business.

V

Valuation: Assess the worth of a business by considering factors such as financial performance, industry trends, and comparable transactions.

W

Workforce Analysis: Review your demographics, skill sets, training programs, and labour relations to determine human capital strengths and risks. Your people are your biggest asset.

X

Xero and other cloud based accounting software: Streamline your management and accounting information so that it is all in one place. A robust management information system such as Xero should help increase efficiencies within your business.

Y

Yield Analysis: Carry out a yield analysis, this is a calculation of the return on investment (ROI) or profitability of an asset/ investment based on projected cash flows and risk factors.

Z

Zero outliers: Consider any outliers you may have left in your due diligence. This is the evaluation of unique or unconventional factors that may impact the success of your sale or acquisition.

Making it as simple as ABC

There’s a lot to consider when it comes to due diligence. Having actionable steps to apply to your business can make it a lot easier. And if you need additional help, an advisor can be a great way of ensuring your due diligence is the best it can be.

Our team specialises in all areas of accountancy, taxation and business advisory and can offer a objective and holistic overview of your due diligence.

Get in touch today for due diligence support and advice.