After you (or your business broker) have qualified a buyer to ensure they are serious about buying your business, and are in position to do so, you should prepare the documents they will need to conduct due diligence.
Due diligence
The buyer will conduct a thorough investigation of your business, known as due diligence, often within a time period specified in a letter of intent – a document that indicates 2 parties are willing to do business.
Conducting due diligence is the best way for a buyer to assess the value of your business and the risks associated with buying it. Buyers will want to look at your business’s operations, financial performance, legal and tax compliance, customer contracts, intellectual property, assets and other details.
The buyer may want to:
- observe the operation of your business
- examine processes and procedures
- analyse your business’s finances
- evaluate risks associated with buying your business.
Because of the sensitive and often confidential nature of the information you will be providing to buyers, you should ask your solicitor to draw up a non-disclosure agreement for all buyers to sign. It’s also a good idea to review the records you will be providing with your solicitor and accountant before giving the buyer access to this information.
While you may have valued your business, your buyer may also want an independent valuation. The documents you provide will help this process.
Be prepared to answer any questions potential buyers might have about perceived weaknesses in your business. For instance, they may require explanations for times of poor growth. Explain how you managed these down times and how you improved the business following them.
Learn more about valuing a business.
Documents for the buyer
As part of the due diligence process, buyers will want to review as much of the following documentation as you’re prepared to show them:
Financial records
- Profit and loss statements for the past 24-36 months
These records show the net profit that is left after business expenses have been deducted from revenue. - Current balance sheet
An itemised statement that lists the total assets and total liabilities of your business. It demonstrates your business’s net worth at any given time. - Cash deposit records
Evidence of all your payments and receipts, by cash, cheque or credit card. - Bank loans and lines or letters of credit
Appropriate documentation provides evidence that financial institutions have extended these lines to your business. - Forecasted financial information and business plans
These give an estimate of future business results. - Details of your business’s automated financial systems
Training manuals or supplier details of systems your business uses. - Outgoing costs breakdown
The money spent on your business to keep it operating. Rent and utility bills are examples of outgoing costs.
Business operations
- Utility accounts
Show the cost of relevant utility connections such as telephone, electricity and gas. - Supplier accounts
Evidence of your contracts with external suppliers. - Insurance details
Evidence of your business’s insurance premiums and amounts of insurance accepted. - Stock inventory list
A detailed breakdown of the stock presently on hand. - Business history
Outlines your business’s background with details of the products and services you provide. - Asset list
Details the business’s assets including intangible assets such as goodwill, patents and trademarks. - Audit work paper files (if available)
Provide copies of any previous financial, safety and standards audit results, as well as the auditors’ contact details.
Legal documents
- Client contracts and trading agreements
Evidence of your business agreements with clients and other parties. - Employee contracts and agreements
Evidence of contracts between you and your staff. - Franchise agreement (where applicable)
Evidence of your franchise agreement. - Leases (where applicable)
Documents showing the details of your premises, car and equipment leases. - Work health and safety guidelines
Copies of work health and safety processes and requirements relating to your business and industry (e.g. evacuation procedures and manual handling processes).
Due diligence for a seller
You should also conduct your own due diligence. Your checks as the seller might include:
- ensuring your prospective buyer can secure the finance to purchase your business
- assessing the experience they have in running a business
- learning more about their future plans for the business.
Following the period of due diligence checks, you and the buyer should be ready to finalise negotiations.