A Guide to Due Diligence When Selling Your Business

Poor due diligence is one of the main reasons mergers and acquisitions fail, according to recent findings from Investopedia. This makes sense when you consider the role that this step plays in the sale process. 

Due diligence when selling a business helps ensure that a potential buyer feels the transparency and trust they need to convert. As such, preparedness in the pre-sell stage directly impacts your ability to profit — which directly impacts every other step you take as you continue to build your legacy.

Our experts want to help you reach the highest level of success possible in your upcoming sale. Read on to learn everything you need to know about due diligence when selling a business, as well as the steps you can take to increase your business’s potential for success. 

What is Due Diligence When Selling a Business? 

Due diligence for a business sale typically includes investigative deep dives into a company’s financial reports, operations documents, and legal cases. Prospective buyers then use these data points to determine if a business is worth purchasing. 

Due diligence is a critical step in the sales process for both the buyer and the seller, helping both parties avoid “surprises” later on in the sales process. 

Let’s take a look at each step to consider in your pre-sales due diligence process.

Step 1: Preparing Financial Documentation 

While this can look different depending on your business’s complexity and scale, the most common financial documents to include for due diligence review are: 

• Profit and loss (P&L) statements 
• Balance sheets 
• Cash flow statements 
• Tax returns 
• Records for accounts receivable and payable 
• Relevant forecasts and projections 

All documentation should be relevant to the past three to five years of business and should be as complete as possible for buyer review. This foundational step will help you to sell a business in Austin (or anywhere) smoothly. 

Step 2: Summarizing Legal Information 

Sellers prepare all legal documents that pertain to the business’s corporate structure, including those that define ownership stakes, stock certificates, and shareholder agreements. Legal information, in this context, also extends to all key contracts, licenses, permits, and intellectual property documentation. 

Step 3: Presenting All Liabilities and Risks

This step, while uncomfortable, is critical to the due diligence process. Those looking to sell a business in Houston or elsewhere should centralize all documentation related to: 

• Outstanding debts: Sellers should provide a list that documents all open loans, credit lines, or obligations that are tied to the business. 

• Disputes: Legal risks are often the biggest. It’s best to disclose any current or past legal issues that could impact the business’s health and sale process. 

• Contingent liabilities: These liabilities are liabilities that could happen in the future (such as environmental concerns or warranty claims). While it may seem counterintuitive, taking this look into the future is a fair way to warn the buyer of any possible upcoming roadblocks to business growth and success. 
  
  

Step 4. Documenting Operational Assets

If you’re looking to sell a business in Dallas or anywhere else, you’ve likely scaled your operation to the point that it needs documentation to run properly. Documentation around your operational and organizational needs should include assets outlining your business’s operational processes. Additional documents can include relevant workflow charts, manuals, or handbooks. 

It should also outline each employee's role, contracts, and compensation matrices. In addition, it’s important to include documentation that details key vendor and supplier relationships, as well as the risks that could surface if critical partners were to leave. 

Step 5. Completing Inventory and Asset Verification

This step in the due diligence process is comprehensive, documenting a company’s full catalog of both physical and intangible assets. This list would include things like inventory, equipment, and brand equity, as well as any customer lists that are associated with the benefits. Companies should also consider including depreciation schedules when compiling this information. 

Step 6: Centralizing All Customer and Market Information 

Customer and market information needs to be passed to the customer for due diligence to be truly “complete.” Before submitting, consider rounding up customer contracts and how those contracts contribute to customer concentration. You might also share information about your market position, such as the market share, landscape, and growth opportunities. 

Confidentiality in Due Diligence: Keeping Proprietary Information Proprietary

Due diligence when selling a business can be a vulnerable process, as proprietary information is being shared that could alter the trajectory of your net worth and your business’s future. As such, be strategic about how you share this information: Take steps to protect both yourself and your buyer’s perception of yourself and your business. 

If you’re not sure where to start, consider creating a private space in your place of business for contract review and discussion. Setting aside this space ensures that no passers-by hear any sort of trade secrets or otherwise private information. 

Think about creating and using ironclad non-disclosure agreements (NDAs) to protect all information pertaining to the business. These NDAs should be crafted, vetted, and approved by seasoned lawyers so that nothing is missed. 

Post-Sale Steps: What To Expect After Due Diligence is Reviewed

Now that you’ve worked through the process of due diligence when selling a business, it’s time to think about what to expect once a prospective buyer reviews and pursues your sale offer. 

Expect Negotiation Adjustments