Most people think of due diligence from the point of view of a prospective buyer. While that is typical, it is now becoming more common for business owners to conduct their own due diligence to fix any weaknesses within their company in advance of a potential sale. When weaknesses are addressed before a potential buyer comes in to perform separate due diligence, the value of the company can be much greater.
The value of a company is created by dozens of various factors and elements. One of these factors could be due diligence procedures. Due diligence is the detailed investigation of a business by a possible buyer; its purpose is to evaluate the business’ potential by establishing its assets and liabilities among other things. When completed at a strategic time, it can increase the value of a company.
Here’s an example. Recently we helped one of our clients acquire a business. Shortly after beginning our due diligence procedures, we were successful in reducing the purchase price by approximately 10%. The key factors supporting the price reduction included lost documents and inconsistencies in financial reports. The uncovered issues increased the risk of the business, and our client wasn’t willing to assume the additional risk at the original purchase price. The underlying issues stemmed from the seller failing to protect the value of the business because no succession planning procedures were completed.
The due diligence process is similar to the process homeowners go through before they sell their houses. Before putting up a home for sale, a homeowner would fix any problems and issues in the house. This makes the home more attractive and valuable. When the house goes through buyer inspection, the buyer doesn’t have the ability to drive the price down due to obvious issues being already fixed. Completing due diligence procedures in advance of transitioning your business improves its attractiveness and can help maximize its value. The cost and time incurred to go through the due diligence process is generally minimal compared to the benefit it can provide.