In the process of selling your business, a due diligent checklist is one of the most important steps you must not take for granted. WHY? The reason is that it can make or mar the entire process thus leaving you with a burnt finger. In this article, I will share with you a ten step due diligence checklist for selling a business.
Now for those who don’t know what a due diligence checklist is, a due diligence checklist is a documented guide that helps entrepreneurs conduct a careful analysis of any company that they might be interested in buying. It usually includes a comprehensive list of questions to ask and documents to request for during the due diligence process.
Aside its benefit to the buyer, the checklist also helps the seller know what information to provide. The following make up the typical due diligence checklist:
A Sample Due Diligence Checklists + Template for Selling a Business
1. Profit / loss statements and balance sheets
Profit and loss statements as well as balance sheets describe the company’s financial performance over time.
To determine how profitable the business is, the buyer should request a record of income and expenditure over a 3-year period as well as the list of assets and liabilities available at the time of the check. These will help the buyer know how the business has been faring and see what changes had been made to the business over the period reviewed.
2. Supporting financial documents
Aside the profit and loss statements, the buyer will need to look into supporting financial documents such as account receivables and accounts payables ledgers, depreciation schedules and other related reports.
Depending on the degree of analysis agreed upon by both parties, the buyer may also review the company’s bank records, vendor invoices, tax returns, equipment maintenance records, employee files as well as sales and payroll tax filings.
3. Lease agreements
The buyer should also review office premises leases and equipment agreements in order to understand the responsibilities and obligations stated in those agreements.
4. Contact the BBB and others who know better
The buyer should carry out additional investigation about the company to be acquired by contacting the Better Business Bureau (BBB)—or similar agencies in your location—to find out about the company’s reputation. It may be that the owner wants to sell the business due to a soiled reputation, which will cause huge problems for the buyer.
The buyer should also find out if the business is not relying on just a few customers or on certain skills that only the owner possesses. In addition, the buyer should contact key employees (since they know more about the business) to find out if the company has a record of honest dealings and timely fulfillment of obligations.
5. Permits and licenses
The buyer must also check whether the business permits and licenses are valid and up to date. If the buyer nurses doubts over the authenticity of any of the documents shown, verification should be made with the issuing agency.
6. Equipment and other assets
The buyer should request and review the list of the assets to be sold and investigate all of the equipment, machinery, and other property of the business. This is to ensure that they are all in good conditions and are properly registered.
In case there is some faulty equipment, an honest seller would have made this known to the buyer upfront rather than let the buyer find out for himself.
7. Competition analysis
The buyer will also need to analyze the competition. Fierce competition may have been the undisclosed reason why the seller has decided to take the business to the market. To find out if this is the case, you will need to assume a detective role by checking the neighborhood to learn how many similar businesses are located close by.
Although there is no rule that sets the boundaries for low or high competition, the buyer will need to make a subjective judgment as regards how the competition might the business to be acquired. This is a very important part of the due diligence procedure.
8. Industry specific investigations
The buyer needs also to find out whether rapid technological advancements or new environmental regulations are likely to render the company’s equipment out-of-date. No doubt, outdated equipment will put the business at a disadvantage, as it will be left behind by other businesses using newer technology.
The buyer also needs to find out if the cost of goods and other business expenses are the same with what obtains with other businesses in the same industry.
Just before closing the escrow, the buyer should conduct an inventory of all the products, parts, and supplies to be sold. This is to ensure that the net value of these items matches the amount offered for them.
10. Title checks
The buyer needs to ensure that the seller actually holds clear title to all the assets of the business, unless disclosed otherwise. Skipping this part may predispose the buyer to shocking surprises in the future. Although this part of the due diligence process is ordinarily the job of the escrow officer or company, it doesn’t hurt for the buyer to be involved, too.