- What is due diligence?
- Why do I need it?
- How long does the due diligence process take?
- How much does due diligence cost in the UK?
- What are the winning lottery numbers for the next Euro millions jackpot?
All but the last of these questions (sorry about that) will be answered in this post, giving you a complete checklist of everything you need to know about due diligence when buying or selling your business in the UK.
What is due diligence when buying or selling a business in the UK?
There are many reasons why you would want to buy a business in the UK but I’m guessing that to be saddled with massive business debts and unwanted legal concerns is not one of them.
Due diligence is a detailed audit of everything your prospective buyer would need to know before purchasing your UK based business. Due diligence exists to protect both the buyer and seller of a business before they engage in any financial transaction.
As a seller this means that all of your companies dirty laundry is laid bare for your potential buyer to see. All of your debts, employee disputes, out-dated contracts and complete financial records need to be provided so a business investor knows exactly what they are getting into.
It also means that if your business for sale is a genuinely attractive proposition then many potential barriers to sale are effectively eliminated by the due diligence process, helping you get the right price and in a much faster time.
Well, I think that covers the ‘why you need due diligence?’ question.
The rest of this post will break down exactly what you need to provide in a due diligence audit, how much you can expect to pay and some useful tips and tricks along the way… enjoy.
Now, the ten steps of due diligence…
Let’s suppose an investor has seen your business for sale, perhaps on WeSellAnyCompany.com (a little shameless self promotion there) and they are instantly super excited and want to know more about you. The very first thing you need to do is have them sign a NDA (non disclosure agreement) keeping your company information private. You may meet with your investor on a number of occasions before you both decide to take it to the next level (kind of like dating, minus the NDA).
Gather your due diligence team
Yes I said team. Generally speaking, the larger the business the larger your due diligence team. There are some very technical aspects to selling a business and I would at the very least enlist the assistance of a corporate lawyer and an accountant. A business broker can be rather useful too.
If you don’t have the right help in place then:
- You are setting yourself up for a lot of work – potentially guesswork. This is not an area you want to skimp on.
- You stand a good chance of getting a bad valuation for your company, meaning you receive a lot less money.
- You are placing yourself in the firing line for possible lawsuits if you are left with warranties or indemnity claims.
- Your business and Assets
To begin you’ll need to provide: Business plan, key operations, assets and copies of contracts between customers and suppliers. Why? Because your buyer wants to know how your business makes money.
- Company ownership
Who is selling your company and what is the company legal structure? Unless you are a sole trader you’ll have directors, shareholders etc. Evidence of which must be provided.
- Pension plans
Contracts with employees, and employee benefits and schemes such as pension / medical plans will need to be provided. Any unresolved employee disputes will also need to be listed. Your buyer will need to know exactly what they are getting themselves into.
- IP (Intellectual property)
We’ve seen it happen where a buyer will purchase a company purely to own particular IP or technology to make their own business run more smoothly. In any event all IP and technology your company owns will need to be provided.
- GDPR (Data protection)
Companies store data in a variety of ways. Potential buyers will need to be informed of your current practice.
- Legal disputes
When a buyer takes on your business they are also the proud owners of your liabilities. This includes any legal disputes you have within the organisation or externally. This is why you must provide this information in advance.
Potential buyers will need to know about all insurance policies held by the business and any claims made to date.
- Health and Safety
Buyers may want to see that you have appropriate health and safety procedures in place.
I’ve left the most obvious till last but any potential buyer will need to see your business is a financially viable option for them. Naturally this covers profits and losses, but also looks into tax and VAT to make sure returns have been filed and made. They will also want to see any money your business has borrowed and how much of that has been paid back.
Speaking of cost – how much you can expect to pay for due diligence is actually impossible to say. It largely depends upon the size of the company and the individual costs of your due diligence team. I can say this though, if you are serious about getting a great price for your business for sale then your outlay should reflect that.
Our key take away for any business (apart from don’t do this all yourself – enlist help) is to run your business as though you are preparing it for sale, even if you are not. It means that when it comes time to sell your business all your proverbial ducks are in a row – I love that phrase, actually comes from the old-fashioned fairground shooting galleries – your records will all be up to date, maximising the return when you sell and it also means you’d be running a lean slick money making machine in the meantime.
Thanks, for reading.
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