Preparing to Sell Your Business: The Importance of Audited Financials and Due Diligence
Once you’ve decided to sell your business, you’ve got a lot of work ahead of you. You’ll need to partner with various advisors to help you with the sales process, and you’ll need to undergo a thorough audit of your financials.
Your financials provide potential buyers with a comprehensive view of your organization’s current and prior performance. Typically, buyers want to review three years of audited financials before deciding whether to purchase your company.
It’s advisable for all businesses to undergo a yearly audit or review regardless of their size. An annual audit can pinpoint problems early before they snowball into more significant issues. When it comes time to sell your business or obtain financing, you’ll already have a set of audited financials you can easily include in a prospectus.
Setting Up Your Business Sale Advisory Team
Before selling your business, create an advisory team that you can rely on throughout the process. Start by searching for a lawyer experienced in business sales and acquisitions. If you can find one with experience in your particular market sector, it can be significantly helpful.
Your lawyer will advise you on your various options for selling your business and walk you through the steps of the process. They may be able to recommend advisors crucial to the sale, such as a valuation specialist, CPA, and business broker.
Your valuation specialist will help you determine how much your business is worth. They’ll comprehensively review your audited financial statements, your company’s position in your market sector, and the future prospects of your business.
The valuation helps you determine the asking price for your company. You’ll use the valuation to compare the various offers you receive from interested buyers.
A CPA can help you discover the financial consequences of selling your business. They’ll guide you through the tax implications of the sale as well as navigate any financing options for the company.
Sometimes, buyers offer installment agreements to purchase a business rather than an upfront payment. Your CPA can help you understand the options and how they’ll impact you in the future.
Your business broker will prepare your prospectus and market your listing among interested parties. They’ll handle the deal from end to end, including facilitating negotiations and identifying any non-negotiables you want to include in the sales contract.
Hiring a business broker can help expedite the sales process. They’ll also assist with the due diligence process, which is complex.
What to Expect During a Due Diligence Audit with your Buyer
Once a buyer makes an offer on your business and you provide them with a conditional acceptance, the due diligence process will begin.
A due diligence audit will encompass all facets of your organization, including its finances and operational landscape. Your buyer will want to ensure they fully understand every aspect of your business before purchasing.
You can expect many questions from the buyer’s accountant and legal team. They will closely inspect your books for errors and seek to understand your revenues and receivables. If you have contracts with customers, they’ll want to examine them.
If your organization has lots of debt or large portions of the organization are held by investors, you can expect more scrutiny. The buyer will want to understand the terms of the debt and ensure that your investors are agreeable to a buyout.
Your advisory team knows how to assist you with the due diligence process. That’s why it’s crucial to create your team early — they will need time to understand your business to field questions from your interested buyers.
The due diligence process can be lengthy and invasive if you have a large business or one with many aspects that your buyer will need to evaluate. Auditors may ask for information concerning your competitors, any inventory or assets you have, intellectual property, and potential legal claims.
The audit will also evaluate any agreements you have with employees or contractors. Your buyer will want to understand your employee’s contracts with your organization, including their benefits and potential severance packages.
Remember, once your buyer purchases your business, they’re likely to make significant changes. They’ll want to run your organization in a way they find efficient. They may make substantial alterations to your company, including letting go of your employees and hiring others who align with their vision.
While you can include specific terms in your sale that protect certain employees, customers, or vendors, your buyer doesn’t have to comply with them. Once they own the business, they can make the changes they see fit. You’ll no longer have the right to decide how to run the organization.
Perform Your Own Due Diligence on the Buyer
As the seller, you have the right to perform your own due diligence on potential buyers. You can ask them for records showing their financial solvency and capability of following through on their agreement.
These financial records can help you understand whether the deal is likely to go through or whether they may need help with the financing for the purchase.
If the buyer has purchased other organizations in the past, you can ask them for records pertaining to the companies they’ve bought. For instance, if they purchased a similar competitor in your market, you may evaluate that company’s performance following the deal.
You can see whether the buyer followed specific terms of the agreement, like keeping existing employees on board or sticking with the company’s vision. If they make changes you disagree with, you might carefully consider whether the buyer is right for your company or whether another is more suitable.
Audited Financials Are a Single Part of the Due Diligence Process
While you’ll want to ensure you have fully audited financials for your organization, they represent only a tiny part of the due diligence process. You can expect many other questions, including inquiries regarding your operations and customers.
Hiring an experienced advisory team can help ensure you have the advice you need before turning over the keys to your business.
Do you want to sell your business quickly and confidentially?
Cowen Partners’ business sales approach is notable because we are one of the nation’s leading executive search firms and are in touch with potential buyers daily. Our Partners come from a diverse set of backgrounds and skills, ranging from business owners and entrepreneurs to CPAs and financial analysts. This diversity of talent enables the team to guide our clients with firsthand knowledge and experience through all phases of the business processes of building, buying, and selling.
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