Due diligence is the process by which potential buyers who have expressed a serious interest in the business (after submitting a letter of intent or a conditional offer) verify that the business is truly what they believe it to be.  With such a broad definition, its is understandable that business sellers don’t really know what to expect. The process is not standard and changes dramatically depending on the type of buyer, the industry, the size of the business etc.

In general terms the more sophisticated the buyer, the longer and deeper the due diligence. Large transactions, especially share purchase transactions require more sophisticated due diligence. Also, the more knowledge about the business the buyer has before signing a letter of intent or conditional offer the shorter the due diligence period. Whether the business seller (or Broker) should only accept a letter of intent from buyers who already have received extensive information about the business is always a dilemma. On the one hand, giving away confidential business information to a large number of potential buyers who simply expressed an interest in the business is very risky as it increases the chances of this information ending-up in the wrong hands. On the other hand, committing to a letter of intent from a buyer with very little knowledge about the company increases the chances of a deal falling through. A deal falling through does generally not help when trying to sell the business to other potential buyers.

Despite all the uncertainty regarding the due diligence process, there are some principles that if applied correctly can smooth up the due diligence process and increase the chances of reaching a deal:

1. There should remain some flexibility in negotiation during due diligence: if negotiations are too tight, deals generally don’t make it through due diligence. Buyers or sellers accepting reluctantly unfair terms and conditions have all the time to change their minds during the due diligence and deals generally fall through. A deal should be win-win where both parties receive a lot of value and are willing to give up a little bit more to save the deal.
2. Sellers should be upfront about the good, bad and the ugly about the business. It’s mach better  for the seller to loose a buyer before signing the LOI rather than during due diligence so let the buyer know in advance what to expect. Furthermore, it’s almost impossible to hide an important fact about the business to a savvy buyer. In this case honesty does pay.
3. Understand the buyer’s hesitations and deal with them. It’s perfectly normal that buyers show suspicion during due diligence. It’s up to the seller to bring relevant facts and address buyers’ concerns. This suspicion is not personal and should not be interpreted as an accusation of dishonesty.  Buyers are committing huge amounts of capital and their whole future relies on the success of the transaction.
4. Good preparation: It’s advisable that sellers prepare a large portion of the documentation needed for due diligence before putting the business up for sale, especially financial and accounting information, stock, legal documentation etc.
5. Patience: It takes a lot of patience to sell a business and due diligence is one of the final steps. At this stage, sellers are generally exhausted and are vulnerable to emotional bursts.  It’s important to control your mood.

While my description of the due diligence process might seem too general and lacks specifics about the types of documentation needed, my experience as a Business Broker in Toronto, Ontario has taught me that applying these principles is a key factor is to reaching a successful deal.

In our previous post we explained the work involved in selling a business and if it makes sens for the seller to do it on his/her own. The time,  effort and money spent by the average seller trying to sell their business is rarely worth it. If you add to that the possible mistakes that a seller can make when trying to sell on their own and the high cost of these mistakes, the decision to hire a professional is almost obvious.

Of course, in some rare cases, sellers should definitely learn as much about business sale process and do it on their own. These circumstances include extremely unique businesses that only a small number of potential buyers could acquire and the sellers already knows about them. In such rare circumstances, sellers would be better served by themselves because they can focus on these rare potential buyers and make a deal happen.

In most other circumstances, a competent business broker will add a lot of value to the transaction, much more that the fees he/she charges.

Business Brokers will save you time so you can keep focusing on your business and keeping it in a good salable shape while the broker is marketing the business. They will protect your confidentiality and save you from the harm that a confidentiality breach can cause to your business. Business brokers also expose your business to a much wider audience so you have qualified leads to choose from. You can then sell to the buyer who represents the best fit for your business and has the higher likelihood of making it successful. Such a buyer will recognize the potential and would pay  the highest possible price. Business brokers also create competition between buyers increasing the chances of obtaining the highest possible price from the market. The linked article about business brokers summarizes business brokers’ involvement in the sale of a business and the advantages of working with a licensed broker for business sellers and buyers in Ontario, Canada.

How to choose a business broker?

The most important criteria to look for when choosing a business broker are:

• Honesty: when selling a business it is extremely difficult to fool people by over-embellishing or misrepresenting your business to them. They will discover the truth sooner or later and you will have wasted your time and money. Honest business brokers are much more successful because they earn buyers’ trust and can sell them businesses.
• Professionalism: professional brokers attract serious buyers and protect sellers’ confidentiality. You can identify the level of professionalism after a brief interview with the broker.
• Personality fit with the broker: the broker seller relationship has a large impact on a successful sale. Brokers have to believe in the business and in the integrity if their seller to be able to sell the business.  I personally cannot sell a business if I don’t trust the seller!
• Marketing capabilities: Selling a business requires a wide exposure to potential buyers. The broker needs to have a successful marketing system to generate leads.
• Knowledge and experience: business brokerage requires specific skills in finance, sales, marketing and strategy to be able to explain the intricacies of the business to buyers.
• Interpersonal skills and energy level: Brokers talk to more than 50 potential buyers before finding the right buyer for the business. Successful brokers enjoy talking to people and are enjoyable to work with. Their level of energy is so high that they can create  enthusiasm in buyers’ minds and give them confidence to make the difficult decision to buy a business.

If you are a business seller and you have found a broker that has all these qualities, then you have found the right person to sell your business and you would probably be better off working with that broker.

What is involved in the sale of my business? – what is the process?

• Understand what makes my business unique, how profitable it is and what prospects are for the future.
• Analyze my  financial statements and identify trends.
• Adjust the profit figures to reflect the real profits of my business
• Determine a range for the asking price for my business.
• Write an attractive ad and post it in more than 10 business for sale websites  (it would cost a business owner about $500/months to pay for the ads)
• Call people who inquired about the business, interview them and make appointments with them without divulging specific information about the business -  keeping confidentiality is the key to a successful sale
• Meet with interested people and verify that they are ready, willing and able to buy a business.
• Have the qualified buyers read, understand and sign a comprehensive confidentiality agreement and provide a copy of their ID’s
• Provide buyers with selected business information and explain it to them.
• Help buyers think thoroughly on what they really want to do and whether the offered business really fulfills their needs.
• Understand buyers circumstances and solved  any miss communication problems that might occur.
• Follow up with buyers and explain them how the offer process works.
• Explain all the intricacies of the offer and make a decision about offers.
• Understand the due diligence process and go through it with the minimum risk.
• Help the buyer decide about the outcome of the due diligence.
• Have the buyer sign the forms to firm up the deal.
• Cooperate with the lawyers for an legal maters.

As a business owner, can I reasonable sell my business myself?

Yes everything is possible if we pay the price but is it really worth it? Following the steps described above is extremely time consuming, especially for somebody who is doing it for the first time. This is what might or will happen:

• As when we want to learn new things, we make mistakes in the beginning. Can you afford to make mistakes on the sale of your business? Possible mistakes include, giving your sensitive information to the wrong hands, focusing too much on the sale and letting your business deteriorate to the point where it’s not sellable anymore, spending a lot of time and money on lawyers and accountants with buyers who are not real buyers.. and the list of possible costly mistake goes on and on.
• Becoming frustrated and abandoning the sale of the for lack of help. The sale of a business is very emotionally draining. With no help, very few people can handle the ups and downs. Most people give up on the whole idea after a short trial period.
• being taken advantage of by dishonest fake buyers. The best way to learn about a particular business is to pretend that you are a potential buyer and get as much information as possible about it. Business owners find themselves spending tremendous time and money to teach their future competitors how to do business. This is so unfair!

What if I have already a buyer I am working with, should I drop him/her and look for a broker to sell my business? if your buyer seems serious and has already spent money and efforts on the purchase of your business, you should work with him. You might hire a broker who will continue to market the business so that your buyer feels pressure from other competitive buyers and take less time to make his/her decision to buy and/or offer a higher price. You could also focus on that buyer and only hire a broker if it doesn’t work out. Most importantly, you should be firm with buyers and refuse to be at their mercy and give away what ever they require. Unreasonable requests are requests that could harm your business should the buyer not complete the transaction. Such requests include divulging trade secrets, customer lists etc..

There are however some circumstance where you might do a good job selling your business yourself. These are a few examples:

If your business is so unique that only a few potential buyers can acquire it. For example, the business requires some specific skills that only a few specialized companies/individuals have and you know who they are. In this specific case you might be better-off contacting this short list of potential buyers and negotiating with them directly. Of course professional help is always a plus.