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How to make sure that you are ready to answer due diligence questions

due diligence questions and answers

due diligence questions and answersSo there you are, you’ve just finished uploading your last document into the virtual data room and ticked off the corresponding item from the list provided to you by your solicitor or business broker.

Time to relax, sit back as you’re now ready to field all questions from potential buyers ….. really?!

How do you really know that you are ready? You could wait until the due diligence questions start coming in or, with better planning, how about doing a practice dry run through?  You’ve got the time now to do this and we’ve got just the thing, our due diligence questions packs. Each pack has 250 unique questions and come from Joanna’s due diligence process so they were all real questions that had to be answered! If you can quickly answer each one by simply quoting the right data room reference or if they aren’t applicable to your type of business and you can just ‘N/A’, you definitely are ready!

It’s really worth doing a practice dry run because when the due diligence questions start to come in thick and fast, you’ll find it easy to bat the answers back. This in turn will free you up to focus on the business sale negotiations and you can concentrate on keeping your business value up.

If you’re wondering what type of questions the packs contain, here are six randomly chosen for you to quickly answer with just your matching data room reference number. If the question is applicable to your business and you haven’t got the reference number readily to hand, now’s the time to add to your data room and use our pack to really make sure you’re all prepared!

  • Sales order book and pipeline, by product/service, rated by percentage likelihood to win new business income, and the expected time frame for each opportunity
  • Analysis of revenue by customer for the last two financial years (including customer names).  Details of financial terms (including commission rates) with top 15 customers for each of product/service
  • Details of any benefits/expenses provided to employees/directors, copies of any PAYE Settlement Agreement and P11D dispensation
  • Sickness absence and staff turnover rate for past 12 months
  • Copies of insurance policies
  • List of customer complaints/warranty claims within the last two years

 

Fielding questions successfully

If your business broker hasn’t mentioned it to you already, you should have an efficient system in place to field all due diligence questions successfully. Make sure that all questions from each potential buyer is entered into their own spreadsheet. This should be done by the buyer’s representative themselves and all questions fielded through one person because there could be a number of people on the buyer’s side carrying out the due diligence. This system provides control and allows you to quickly update it with the necessary answers and upload the latest version to the data room. Date raised, By Whom, Question, Functional area, Data Room reference and commentary should all be column headings.

As your due diligence period moves ahead you’ll find that the same question is asked in a different way by different potential buyers and don’t be surprised if they ask the question without even visiting the data room to see if the answer is there!

The quicker you can demonstrate that you have all the answers to hand, the more confident the potential buyers will become and in understanding your business better, they should realise the value of the business and want to have it even more bringing you one step closer to completion day.

Kim Brown, Co-Founder of Business Wand, helps business owners navigate their way through the start to finish process of selling a business. Her specialty is to help owners cut costs and increase profits prior to sale. To understand how you can sell your business quickly for the highest sales price, purchase the book, “How To Sell A Business: The #1 Guide to maximising your company value and achieving a quick business sale”

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My business due diligence experience

due diligence calmness

Due Diligence Naivety

When I first heard the words ‘due diligence’ I wondered what that was all about and was told ‘oh, its when the potential buyers look at your books’.

I took that to meant the business‘ finances; so things like the profit and loss account, balance sheet, bank account statements and the management information reports that we had.

That’s probably true if your business is turning over less than a million. But as my business didn’t fall into that category our solicitor passed over a due diligence questionnaire (DDQ) which ran to 12 pages! It was then when I had an ‘OMG’ moment as I looked through and saw that it covered all the different functional areas of the business.

We started collating the document list ASAP! And to help you know what you’re getting yourself in for we’ve reproduced the list in our ‘Preparing for Due Diligence Checklist Pack’ along with my recommendation for your data room folder structure.

On top of this during the business sale process in order to field and answer all the demanding questions from the buyers, the documents started to pile up.

By the end of the process, for my business, it turned out we had prepared approximately 800 documents! We had to provide examples of everything. Detailed sales forecasts for the next 3 years, samples of our software code (for IPR), a record of the last 2 years salary increases, a list of leavers and reasons why they left the company.

Some of the information was provided by the solicitors, like property searches and they helped with scanning paper contracts as we didn’t have the right tool nor resources to spend on this.

But the vast majority of the documents, 95%, has to come from the business and your business broker isn’t really going to be able to help besides pointing out what documents are essential and missing.

Delegate, delegate, delegate

Preparing 800 documents for due diligence did take a toll on me. Luckily only a core 30 documents changed over time that needed to be updated during the business sale. However, in order to get all the documents ready in the first place, I changed the business operating processes to be more efficient so I could just use the documents as they stood or with minor ‘tweaks’ and at the very least have the right company folder structure where I could locate the information very quickly. I also made sure that processes such as sales, finance, account management were documented which is simply good practice to do.

How you know you’re fully prepared

Having this all in place allowed me to field the questions from potential buyers quite easily and provide the answers within a very short time period, mainly within a 24 hour turnaround time.  Being prepared allowed me to refer them to the right document in the data room to go look at instead of unique answers to each question. And if the answer wasn’t readily available, that’s when it got created and added to the data room.

Of course going around the sales process over five times does make you a pro and you quickly find ways to make it all the more efficient. That’s why I created the  ‘Preparing for Due Diligence Checklist Pack’. It gives you a head start as it includes all the common documentation in a checklist that a business going through due diligence needs.

As long as you have one person that is responsible for managing the data room and can source the documentation from the business whenever needed (this includes 11pm at night), you will find the whole due diligence stage easier and best of all it doesn’t have to all be done by you – allowing you to focus on the business and not in it!

Joanna Miller helps business owners navigate their way through the start to finish process of selling a business.  Her specialty is helping owners understand how to prepare and make the most of their business sale process to maximise their company’s value. To understand how you can sell your business quickly for the highest sales price, purchase her book, “How To Sell A Business: The #1 guide to maximising your company value and achieving a quick business sale

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5 Key Due Diligence Requests To Prepare for Now (before you sell)!

Due Diligence Requests

Due Diligence Requests5 Key Due Diligence Requests

Due diligence is the analysis and investigative process that follows an offer or letter of intent from the buyer. When you make it to this stage it’s safe to say that the buyer is serious.

The idea of due diligence is to evaluate the potential opportunities and risks of the purchase, and discover any other particular issues. Once completed, due diligence will facilitate the buyers team to manage their thought processes efficiently, so as to deal with and prioritise the decision-making procedure. It will ultimately lead to optimising any deal terms while recognising and addressing risks linked with the transaction.

It’s important to understand that due diligence does not merely entail gathering data and checking boxes. Largely, achievements are based on the worth of future cash flows. Your buyers will need to determine the worth of the particular assets that they are buying or the responsibilities that they are assuming. They will want to analyse the data in the perspective of how upcoming cash flows will be influenced by the issues examined. Due diligence items not only include the hard information that your buyer requires to measure prospective financial, legal, and regulatory experiences, but also provide insights into your company’s physical structure, prevalent practices, available human resources, operational processes, relationships with supplier and customer, competitiveness in the market, and future outlook. Following are the main items required for the purpose of due diligence by the buyer.

Due Diligence Request #1: Sales Forecast

The sales forecast is of utmost importance in a business plan, revealing the detailed forecasted sales for your company. Almost all companies require producing forecasts of their short to medium term sales. Sale forecast is of special attention to potential investors eager to gauge the dimension of a prospective purchase. It is one of the most cared about Due Diligence items requested by the buyer’s team. On the other hand, it is also a complicated section for entrepreneurs to prepare, as they might not have historical statistics upon which to base their forecasts. The key for business owners is to build some reasonable assumptions that they can support. Preferably they must look to discover benchmarks, hence aligning their figures with other businesses in the industry. Sales forecasting need not be 100 % accurate, as nobody can foresee the future. Sales forecasting is intended to assist your buyers weigh up the existing and future demand levels, so that they can estimate the resources that would be required to make those sales. One massive thing to keep in mind is that whatever you supply to  the buyer you’ll have to make sure you can make it happen! Don’t inflate figures or you’ll really have a struggle on your hands when it comes to puting the proof in the pudding.

Due Diligence Request #2: Employee Information

The human resource being the most important and dynamic asset of any organisation, your buyers can’t overlook employee information. The employee information term is used for a broad and comprehensive system that keeps and tracks records pertaining to all the employees in an organisation. It reveals ample details related to their resumes, contracts, job descriptions, leave and attendance records, inter-company transfers and the workflow concerned during the transfer procedure, track of appraisals and promotions etc. It also includes  Recruitment, Payroll and Training Systems of employees in your company. Buyers will be looking out for key employees so it’s important to make sure they don’t jump ship before or during the sale.

Due Diligence Request #3: P&L and Balance Sheet plus Monthly Management Information

P&L and Balance Sheet are the third most important Due Diligence items requested by Buyer’s Team. To guide your business to the financial track you desire it to take, you need to understand where you’re earning money and where you’re spending it. That’s why you must maintain accounts and generate regular reports, including profit & loss account and balance sheet. Whenever you sell your goods or services to others, it costs you money to pay for the production of those goods and services. And, in return for those goods or services, you will be receiving money likewise. So, if you are getting more than you are paying for, you should be making a profit. This record is kept under profit & loss account.

Your balance sheet depicts the balance between your assets and liabilities. The balance sheet for your company provides a clear view of your business worth at one specific moment in time. Generally, it is done at the end of the financial year and provides you the situation of the company from one year to the next. However one can also draft monthly or quarterly balance sheets. Your buyers will be examining financial performance and weighing it against earlier performance. You should facilitate them in the process by providing any details that they request.

The Monthly Management Information shall provide a snapshot of the performance statistics available in the Management Information System on the last day of every month. It is usually posted several days after the ending of the reporting time. Your buyer would like to take a look at the MMI, so you should make sure that you prepare this document every month.

Due Diligence Request #4: Statutory Information on Company

Statutory information on company pertains to the information relating to its statute, code, or written law, which helps to understand the company infrastructure. This information is usually given in the memorandum and articles, and should not be a problem for you to and your team to create.

Due Diligence Request #5: List of Client Contracts

Your clients are your business assets. Consequently, a major part of being successful in business is to keep them close. The number and worth of your client contracts would determine the sale price for your business. Apart from scrutinising client contracts, your buyer may also like to know how you keep the records of your customers.

The Due Diligence aspect of selling your business is a lengthy and time consuming one. If you have time on your hands now, it’s in you best interest to prepare the information needed proactively rather than re-actively. In other words, sort this out now so that when it comes to crunch time you can put all your efforts on making sure you’re hitting the forecasted targets! At Sell Your Business, we’ve created a fantastic Due Diligence pack that will help you prepare. Don’t let the buyer or your team hold you to ransom – get one step ahead! Check out our Due Diligence collection today!

Kim Brown, Co-Founder of Business Wand, helps business owners navigate their way through the start to finish process of selling a business. Her specialty is to help owners cut costs and increase profits prior to sale. To understand how you can sell your business quickly for the highest sales price, purchase the book, “How To Sell A Business: The #1 guide to maximising your company value and achieving a quick business sale”

 

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Understanding the importance of the data room

Understanding the importance of the data room

Before

Had you been selling your business before the age of the Internet, you would have set up a physical data room for due diligence of your business records by the buyers. A data room becomes necessary when there’s a large amount of confidential data that you want to share with your prospective buyers for the process of due diligence. In old times, this would be a closely guarded room with copies of all documents that are requested or desired by your buyers during the process of business sale. Only one party would be allowed to visit the data room for due diligence of records. In case extra copies were needed, they would be provided after keeping a proper record, so that no information fell into unwanted hands.

Now

Setting up a physical data room is time consuming and expensive (take a look at our data room structure sample in our Free Document samples section). At times, the advisors and accountants of the buyer may have to be flown in from another city just to scrutinise the documents in the data room. Thanks to the Internet, these days, companies establish online or “virtual” data rooms that are accessible to all interested buyers through the Internet. A virtual data room is simply a secure website that contains all the required documents from your company. Some of these documents may be highly confidential, so a virtual data room has fool proof security against hackers or unauthorised access. The people who are authorised to access the information are given login IDs and passwords. Also, you can assign different clearance levels to different people, which means that a person can only access the documents that are required for diligence by that person. Restrictions are applied on dissemination of information through copying or printing.

Although a physical data room still becomes necessary in some highly secretive deals and government contracts, the increasing speed, ubiquity and security of the Internet has made it quite economical and convenient to establish a virtual data room. When you are going for a business sale, many bidders may be interested in your offer. If you have more buyers and all of them are asking you for different company documents for carrying out the due diligence of your business standing and claims, it becomes problematic to deal with them separately. Your data is confidential, so providing your documents to the bidders individually will loosen your control on your confidentiality. Moreover, responding to the buyers’ request becomes cumbersome and requires dedicated resources. The process of enquiry and response is also more time consuming. Your buyer may be in a different part of the world and may require access to the documents at odd hours. All these problems can be solved by simply establishing a virtual data room, which your buyers can access 24×7. Providing logins and passwords to each one of your buyers ensures tight control, as you are all the time aware of who is looking at which particular document. The documents that contain sensitive information can be shared only at key moments, with key people.

A data room multiplies the chances of making a bountiful exit from your business, as your potential buyers can find the documents at their convenience. Also, a data room indicates that you are indeed serious about selling your business and want to keep the whole process as transparent as possible. By being more open with your documents and data, you are basically showing your confidence in your business and your respect for the requirements of your buyers. Your data room will be used by the buyer’s acquisition team, who may belong to finance, legal, and other departments. It can be hard to respond to requests from all these quarters if you haven’t  thought through and established a virtual data room and in the worst case scenario the deal could collapse with a nervous buyer if you were unable to provide the evidence in a timely manner.

In summary here’s why virtual data rooms are very effective during business sales:

  • More buyers become interested in your sale proposal when they know that you will provide them access to all relevant documents through a data room.
  • If you have given some time limit for bidding, having a virtual data room can increase the number of bids that you receive, as more people will be able to access your information, which is available 24×7.
  • You can have the knowledge about what your bidder(s) is looking at and understand the intentions better.
  • The business sale is accelerated as no time is wasted in requesting for and gaining access to the documents.
  • A virtual data room provides better control on data and the people accessing that data. You can apply digital rights management and prevent the documents from being downloaded or shared with unauthorised people.

So if you haven’t started getting your data room together now’s the time to do it and to help you, we’ve got just the thing that will make it easier for you and help you understand exactly what you need to do and what costs are involved, Creating the Data Room Pack which also includes a zipped up data room structure to get you started.

Joanna Miller helps business owners navigate their way through the start to finish process of selling a business.  Her specialty is helping owners understand how to prepare and make the most of their business sale process to maximise their company’s value. To understand how you can sell your business quickly for the highest sales price, purchase her book, “How To Sell A Business: The #1 guide to maximising your company value and achieving a quick business sale

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What is Due Diligence in Relation to Selling a Business?

Due Diligence

What is Due Diligence…

Nobody undertakes the buying or selling of a business lightly, so to find out as much as possible about their potential purchase, a buyer will perform extensive research, known as a due diligence process. This will help them to decide whether or not to go ahead with the purchase, and if so, what level of price they should offer.

There are several reasons why due diligence is undertaken:

The first is simple commercial sense. Committing a large amount of money to acquiring or merging with an unknown company would clearly be far too great a risk, so the more information that can be gathered, the more that risk can be assessed and reduced. Setting a price for a purchase can be a difficult decision to make, based on several factors, so the more information the buyer has, the more confident he or she can be in a proposal.

The second is as “cover” for the decision to be made. The more a purchaser can demonstrate to their managers, financiers and/or shareholders that they went through a due diligence process designed to uncover all aspects of the target company’s operations, the more they can show that the decision was a sound one, especially in cases where there might be commercial difficulties later on.

The third reason is for legal and regulatory compliance. Commercial law in all developed countries requires that shareholders’ funds are protected as far as possible by the process of due diligence, and buyers must follow certain minimum processes to ensure compliance with the legal requirements.

In his book “Due Diligence, a Strategic and Financial Approach”, Luis Gillman sets out nine key aspects of good practice for due diligence when considering buying a business:

  1. Compatibility audit – in which the researcher should explore how well the organisation’s operations are compatible with the buyer’s own company
  2. Financial audit – during which a detailed review will look at all aspects of the target company’s financial position, including looking at published and unpublished accounting information
  3. Macro-environment audit – reviewing the position of the target company in its market, and the prospects for future profits in that sector
  4. Legal/environmental audit – due diligence to ensure that there are no “nasty surprises” regarding potential lawsuits or environmental concerns once a sale is made
  5. Marketing audit – examining the strength of the target’s ability to sell its products and services
  6. Production audit – looking at the quality and quantity of goods and services produced, and how they serve customers
  7. Management audit – reviewing the strengths and weaknesses of the current management structure (bearing in mind that this may well change if a purchase is made)
  8. Information systems audit – to ensure that the company is maximising use of technology, or identifying areas where improvements could be made
  9. Reconciliation audit – bringing all of the above audits together to complete the due diligence process, to make a final decision as to whether the vendor and the purchaser are a “good fit” and whether ultimately, there will be added value to an acquisition.

A buyer will probably only follow all of the above processes in cases of large and complex mergers and acquisitions, and it may be enough for more straightforward business processes that the due diligence process covers only some of them.

Usually, the buyer will rely heavily on the advice of advisors when going through the due diligence process, and this work forms a large part of the expertise of commercial lawyers, accountants, bankers, brokers and other financial advisors.

Due Diligence Performed on You (the Seller)

As a business owner looking to sell your company, you will need to provide as much information as the potential purchaser needs to complete the due diligence process to their own satisfaction. The usual concerns you will have about keeping information confidential do need to be set aside to a certain extent, because a buyer can’t be expected to make a decision based on a partial picture. To protect yourself, it is normal business practice to get your lawyer to draw up a due diligence confidentiality agreement for buyers to sign, preventing them from copying or sharing the information you provide – and crucially, to prevent them from taking action upon it should they decide not to go ahead with the purchase.

It’s a good idea to ask your lawyer or accountant to give you an idea of exactly which documents the buyer is likely to want to see, before the due diligence process begins, so that you’re prepared with all the information. This should help to speed up the process and prevent delays caused by requests for missing information during due diligence. (Check out our Store to find resources that can help you with Due Diligence)

Due Diligence You Perform on the Buyer

Similarly, you will want to perform some due diligence yourself as a vendor. Due diligence is, to some extent, a two-way street, and although you wouldn’t need to go through as much detail as the buyer, you should ask your advisors for help to ensure that the buyer at least has the means to pay the asking price. If the purchase involved the offer of their own shares as well as cash, then of course you would need to do more work to ensure that they were really worth the amount that the buyer claimed.

Joanna Miller helps business owners navigate their way through the start to finish process of selling a business.  Her specialty is helping owners understand how to prepare and make the most of their business sale process to maximise their company’s value. To understand how you can sell your business quickly for the highest sales price, purchase her book, “How To Sell A Business: The #1 guide to maximising your company value and achieving a quick business sale

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Selling Your Business – The 12 Step Sale Process

Selling Your Business Steps

Selling Your Business StepsTwelve Steps to Selling Your Business.

The business sale process is quite straightforward. Provided you’ve prepared for the sale, the journey can be a fun adventure. Listed below are the 12 steps that take over after the preparation stage is complete. These steps also assume that your business sale team is in place. The core team members include a business broker (corporate financier), accountant, corporate solicitor and personal tax/financial advisors. At the end of this process the ideal outcome is to pop the champagne and celebrate a successful completion and business exit.

  1. Create a list of buyers. Your broker will help you brainstorm a large list of potential buyers. To increase the chances for success the larger the list the better. As with any negotiation, competition helps to increase desire and with increased desire comes higher offers.
  2. Create the teaser letter and prepare for issuing. Your broker will create this for you. This is a short letter outlining the broad opportunity. It explains the type of business, top-level figures like profits and revenue in addition to reasons for sale and overall opportunity. At this stage your company won’t be named.
  3. A potential buyer expresses interest. After receipt of the teaser letter, interested parties will get in touch with your broker to express a desire for more information.
  4. Get a Non-Disclosure Agreement (NDA) signed by any interested party. Before your broker tells the interested parties your company name or any more details, a NDA agreement will be signed. This is a legal document that aims to ensure the interested parties keep all materials and information related to the opportunity confidential.
  5. Send the Memorandum of Information (MOI) to any interested parties. The MOI will be written by your broker and is similar to a business plan. It should be around 20 pages long and showcases your business in the best light possible. The document will include your business history, organisational structure, employee bios, shareholdings, customer and markets, sales and marketing, product and service descriptions in addition to financials.
  6. Potential buyer proceeds or drops out. During this step your broker will be contacting all interested parties to determine if they’re interested in proceeding.
  7. Meet the potential buyer face-to-face and give a presentation. This important meeting is often held at your broker’s office or a venue off-site. Generally, the presentation is another version of the MOI spread out into around 10 – 15 slides. Presentations are often targeted to last for a half hour and then open up for discussion.
  8. Indicative offers received. After the presentation stage, your broker will filter through offers. It’s very important to have your personal tax advisor/financial advisor on hand during this stage. Some offers look great but may actually leave you worse off than others.
  9. Shortlist potential buyers. Hopefully you’re flooded with offers and are able to easily shortlist the potential buyers to a few that seem most appropriate for the business. Eventually, you’ll need to choose one and proceed through to completion.  Most buyers will ask for exclusivity at this point as they don’t want to pay the price of due diligence only to lose the sale.
  10. Due diligence is performed. The potential buyers will have teams of people scouring your business to uncover every detail. The process isn’t finished until every stone is unturned. You’ll find yourself filling out spreadsheet questionnaires from one buyers’ department only to be asked the same questions from another team.
  11. Final offer letter(s) are issued. Provided that you are prepared, disclosed any issues upfront and are maintaining forecasted figures your offer shouldn’t be too far from the indicative offers provided in step eight.
  12. Completion. For the final stage you and your team will meet at the buyers’ solicitors office. There’s usually several rooms put aside. One room for signing, one for the buyers’ team and one for your team. There will also be rooms for negotiation and another room for private conversations. If all goes well, the papers are all signed and you finish the day with a celebratory glass of bubbly!

This process can progress smoothly. It can also cause your life to be a living nightmare. The best thing you can do is prepare, prepare, prepare. Find out what you need to do to make sure your business will get the highest valuation and ensure the sale process goes as smoothly as possible. Download your FREE chapter and get started today: “How To Sell A Business: The #1 guide to maximising your company value and achieving a quick business sale – FREE CHAPTER.”

Kim Brown, Co-Founder of Business Wand, helps business owners navigate their way through the start to finish process of selling a business.  Her specialty is to help owners cut costs and increase profits prior to sale. To understand how you can sell your business quickly for the highest sales price, purchase the book, “How To Sell A Business: The #1 guide to maximising your company value and achieving a quick business sale”