Being prepared for due diligence can add thousands to an exit value of a business

The majority of owners go into business with two objectives in mind: firstly, to be successful in what they do; and secondly, to one day sell-up and reap the rewards of their hard earned labour. And when the time to sell comes, exiting owners will want to maximise the value of their business and ideally attract the attention of more than one prospective purchaser.

Undoubtedly, the key to attracting potential bidders is a healthy profit and loss account, supported by a robust balance sheet. However, once the accounts have been scrutinised and a ‘ballpark’ value on the business determined, a whole new phase commences called due diligence.

What is due diligence? This is the process where a prospective purchaser’s solicitor will request evidence regarding all kinds of information. Their purpose is establish what they consider a fair value for the business, and to uncover any hidden liabilities that might come back to haunt new owners. Unearthing such liabilities will have a negative effect on the value of the business and will be used against the owner in negotiations. Here are some examples of documents that might be requested during due diligence:

• company accounts and company law records going back five years;
• management accounts, budgets and cash-flow forecasts;
• insurance documents and outstanding claims;
• contracts with suppliers and customers;
• potential liability claims outstanding;
• directors service agreements and employment contracts of key personnel;
• key policies covering matters such as health and safety;
• key performance indicator outcomes;
• outstanding financing arrangements, such as borrowings, credit or hire purchase; and
• a register of assets.

A solution for owners in defending exit value during due diligence is to pull together in advance all the above documents in one place – commonly known as a data room. Having such a facility will give a professional image to prospective purchasers and speed up the process of arriving at fair value. In addition, data room preparation will allow shortcomings to be tackled, such as a lack of health and safety policy, or proactive management of a potential liability claim.

Having been through a number of due diligence exercises I have come to know what an intense and stressful period this can be. Therefore, getting all the documents together and maintaining them in the months leading up to due diligence will reduce the burden and allow more time to deal with the unpredictable requests that crop up.

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