10-point Checklist For Due Diligence For Sale Of Business
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Robust economies constantly see high-value transactions involving the sale and purchase of large business entities. These deals require comprehensive planning on the part of both parties because of the vast amount of money involved. Due diligence is a mandatory activity carried out by both sides to identify potential problems or liabilities. A seller conducts due diligence for the sale of the business to prepare for all inquiries a buyer will make for closing the deal. A buyer is concerned with financial and legal due diligence and wants information about the target organization’s human resources, client base, and competitors. Numerous agencies like top owing diligence firms in India are providing professional services to foreign investors looking to get a foothold in a fast-growing economy. Let’s look at a due diligence checklist that a business owner looking to sell their enterprise can use as a guide.
1. Build A Professional Team
The deal needs expert handling. Therefore, a professional team must be built, including lawyers, chartered accountants, and financial planners. The team must also have the top management executives involved in running the company and making crucial business decisions. This group will study all aspects of the deal and identify potential issues immediately so that no problems arise in the future. Engaging legal and financial experts from outside the organization will also be beneficial as they will take an unbiased look at the whole business.
2. Get An Independent And Accurate Valuation Of Business
A business valuation is a long process that takes several months to complete. It is a critical part of any due diligence for investors, and most transactions are not realized successfully because the parties do not agree on the final price. Every business owner selling a company wants a reasonable price, while every buyer looks to acquire a reasonable rate. The seller must engage an independent appraiser who will take the correct approach to conduct an accurate valuation of the business.
3. Ensure Financial Documents Are In Order
A buyer’s primary concern is that the organization’s financial condition is along expected lines. Selling parties must maintain necessary documents like audited financial statements, balance sheets, cash flow statements, credit reports, and profit/loss statements. All documents related to tax compliance, whether in local or foreign jurisdictions, including all tax returns, must also be updated and maintained by the seller. Some other important papers that a buyer may ask for are ownership documents of various assets owned by the target company and details of any loans or credit arrangements.
4. Take Care Of Legal Issues
People conducting due diligence for the sale of the business must also resolve all legal issues related to the enterprise. It is a vital part of due diligence procedures as pending matters can affect the valuation of the enterprise, if not the whole transaction. They must also ensure that the necessary licenses and permits for running various operations are valid.
5. Make An Inventory Of All Products And Assets
Create an inventory of all products and assets owned by the company, whether physical or otherwise. This is extensive work and requires precision, as any item if left out, will affect the final valuation. Sellers must conduct the process until the end so that a precise figure for every item on the list arrives, which will help in accurate valuation.
6. Secure All Intellectual Property Rights
Intellectual property assets are precious, and sellers must ensure that documentation establishing their rightful ownership of such investments is maintained properly. It will also be sensible to resolve any disputes surrounding IP assets before moving ahead with the deal. Moreover, if the owner does not want to make any such help a part of the transaction, they must make it clear right at the beginning to the buyer.
7. Compile Information Related To Business Operations
A buyer will want to know in detail about every aspect of the target company, including its operations. The seller must be well-prepared for such queries and compile information related to various business processes, the tools used to execute them, and how the production and delivery system works.
8. Gather Data Related To Human Resources
Human resources or the employees are an integral part of the organization, and the buying party will be interested in the information related to them. Collect data about the number of people directly or indirectly employed by the company and the costs involved in paying their compensation and benefits. In addition, employee turnover figures must also be provided for each year.
9. Compose Client List And Marketing Information
Composing a list of clients with all relevant details will also be sensible, as the buyer may ask for such information. Sellers must also compile information related to the marketing of the business. They must collect all the organization’s surveys and market research reports. It is also necessary for them to list all the promotional campaigns (with costs) that are underway in addition to an inventory of all physical marketing materials.
10. Organize All Industry-specific Information
The buyer will be interested in if any technological advancements or other conditions like environmental regulations will affect the target organization in the future. It will be pertinent if the seller conducts such appraisals and provides all industry-specific information to the buying party. This will help communicate the profitability of the deal to the acquiring organization.
Due diligence for the sale of a business is a vital activity that sellers must conduct with the help of professionals to get an accurate valuation of their enterprise and close the transaction successfully.
Seema Mehra is a Chartered Accountant at Ashok Maheshwary & Associates, one of the top accounting firms in India that conveniently provides statutory audits in India. She is a professional writer and loves to share Financial related topics.