Neglecting buyer due diligence can cost business sellers

Throughout a business transaction process, much time and energy is justifiably spent by the vendor focussing on his or her ‘side of the fence’.

Preparing and best presenting the asset or assets for sale involves significant attention to ensure the best possible outcome.

Everything from corporate and tax structures, governance, systems, existing contracts with staff, customers and suppliers as well as IP protection are all areas that vendors, with the help of their trusted advisors, need to address well in advance of placing the business up for sale.

But there are always two sides to the transaction equation.

Neglecting one side is a costly risk that can be avoided.

Vendors have come to expect that serious interested buyers will undertake a thorough due diligence on the business before putting pen to paper.

However, a similar level of scrutiny and focus does not always flow in the other direction and this can impact negatively on the process as well as the end sale price.

Taking the time to also research and understand the mindset of potential buyers is an investment that can ultimately pay significant dividends to sellers.

Buyer selection and buyer due diligence are crucial steps to be taken along the business sale transaction journey.

Eliminating tyre-kickers

The optimal buyer may not simply be the one offering the highest price.

To ensure the most efficient and effective transaction process it’s therefore important that vendors and their advisors:

  • CRITICALLY EVALUATE buyer interest and separate the serious investors from the “tyre kickers”
  • ESTABLISH a negotiating framework
  • PROVIDE a systematic approach to responding to buyer inquiries

By identifying and negotiating with the right kind of buyer, resources can be allocated more efficiently which frees up management to continue to focus on running the business.

Getting inside a buyer’s head

Understanding how a buyer or investor might value your business is critical information before going to market.

There are several key elements within a business that a potential purchaser or investor will assess when considering their measures of value and ultimate offer.

These elements centre on the existing standalone business, but more importantly its growth potential through avenues including:

  • Cross selling opportunities
  • Opportunities to secure blue-chip customers
  • Possible elimination of a competitor
  • Potential to eliminate duplicated costs

Buyers will weigh up these benefits with potential costs in integrating the business.

The ultimate value a potential buyer places on a business can vary quite significantly from the vendor’s expectations. From the early planning stages of the sale process it’s therefore vital to have the assistance of professional advisors who have experience across both sides of corporate transactions and understand the market.