The Importance of Business Due Diligence
What is due diligence, and why understand the process can help you if you're trying to sell a business. Due diligence is simply the process of examining a company prior to selling or buying a business. The process entails examining historical financial records, active contracts, business design structure, labor structure, insurance policies, equipment condition, growth potential, along with customer relations. Nevertheless this is not a complete list, as there are additional items that may be examined that are specific to particular industry. customer due diligence
An astute investor seeks complete assurance that the business being acquired is freed from any material risk that may occur after the change in ownership. Understanding the homework process can help the seller organize financial records, define the business model, induce an efficient business culture through the entire business, as well as to setup a company model that is sustainable, and is in a field that present good growth potential. Investors seek an acceptable rate of return on the invested capital that is determined on the perceived chance of the industry that the business is run on, and finally growth potential which will help the business appreciate in value.
Growth potential will have to be demonstrated by the company owner using reasonable assumptions from credible sources, be it using industry publications, or directly interviewing customers. You would like to be open and transparent with all the buyer, and deal my way through good faith to avoid any litigations that can come up later when the business was misrepresented, or vital information was withheld in the due diligence process. To protect against the possibility of forecast misrepresentation, investors will sometimes pay a good portion of the purchase amount at the start, and the rest over a 2 years period according to how the business performs financials in each of the years, also referred to as an earn-out sales structure.
For the way the financial performance winds up, the overall purchase price can go down, or up. If the business performs much better than expected, the investor will reward the owner accordingly. In the event that it performs poorer than anticipated, the investor will deduct in the earn-out amount. These types of structure have a tendency to work very well, for the reason that they entice honesty in disclosures and dealings in good faith. A vendor can benefit by view the basic principles of the due diligence process, what to prepare for, how to present the business to a potential buyer, and how to get the best price easy for selling the business.