Due diligence

Due diligence is one of the most important parts of a business transaction. To put it simply, it is the process whereby an investor or buyer verifies all the information given by the seller of the company. If you are a business owner or founder and are preparing to sell your company to buyers or investors, you need to know the important details of due diligence.

The due diligence process is pretty similar to inspecting a shirt you want to buy. If the buyers notice any loose threads, then they will most likely not proceed with the transaction.

In this article, we’re going to list out 6 things and tips you should know about due diligence. We understand how uncomfortable, and sometimes stressful, this process can be for a business owner.

Buyers will do their utmost to dig up your company until they see it in its raw, unfiltered form. They will scour for any flaws they can find. This level of scrutiny can be stressful, so you need to be ready. These tips and tricks will help you have a stronger position in the deal.

Anticipate the requests of the buyer and prepare for it

The first thing you should know and do is how to anticipate your buyer’s requests. To achieve this, you can list out all the things you think a buyer should know about your business.  Once you’ve finished listing, compile and organize all the necessary documents to have them ready for the buyer’s team to analyze.

These are not limited to documents only, you can (and should) include reports and other relevant data about your business. You’ll be stressed out a lot more whenever you anticipate without preparation, especially when dealing with huge amounts of money and strict deadlines. Careful preparation will result in a less stressful due diligence process for both parties.

Before you even think about finding a buyer for your company, make sure that you have at least the following documents at the ready:

• Profit & Loss Statements
• KPIs
• Contracts
• Operating Agreements
• Lease Agreements
• Loan Documentation
• Tax Returns
• Balance Sheets
• Pro Formas

Having these important documents and paperwork ready will expedite the due diligence process significantly. If you can’t comply with the buyer’s request in a reasonable time, they may attempt to take advantage of you. Buyers can use your inefficiency as a reason to pay less for your business. Thus, being on top of your business information is essential.

You should have due diligence as a part of your planned exit process

Having the due diligence event as part of the business exit process will allow you to set essential guidelines. You can require the buyer to provide all their requests all at once, instead of trickling it one by one. Buyers tend to apply this strategy to wear you out and force you to sell your business at a lower price.

By doing this, you’ll avoid wasting time and mental energy due to the buyer repeatedly asking for minuscule information about your business. By setting clear guidelines at the start, your team can easily assist you in setting proper timelines and even limit the number of requests your buyer can make. Do note the buyer’s team may fight back on this. However, by properly scheduling the events, the whole process will move quicker and won’t likely get unnecessarily slowed down.

Learn About Using AI for Due Diligence

Doing the due diligence manually is a painstaking endeavor. Depending on the size of your business, the amount of work and manpower needed for due diligence will increase. Most of the time, the work might be impossible to complete in time.

This is where machine learning due diligence comes in. This new type of technology has revolutionized the due diligence process. By utilizing the power of artificial intelligence, AI due diligence can significantly speed up the process and take huge workloads off your shoulders.

So what exactly is AI due diligence? Simply speaking, artificial intelligence due diligence is the use of machine learning tools and AI to enhance and complement the work needed for due diligence. These AI tools can quickly and efficiently extract all the necessary data for the due diligence process. The AI will go through millions of information about the business and extract all the relevant data, as a human does. However, compared to a human, an AI will do the job with super speed and efficiency.

Prepare a Table of Contents for your various documents

Keeping organized is key to a successful and less stressful due diligence process. One great way to do so is to make a table of contents for all your necessary documents. This is a great way to be accountable for all the paperwork; it will also prevent the buyer to falsely claim that they didn’t receive a specific report.

This one simple step can save you hours of time and plenty of headaches; even spare you from spending thousands in legal fees to properly sort out and resend your documents.

Conduct due diligence on the buyer or investor

If you didn’t know, you can do a counter due diligence on your buyer. This can be a great way to find out more about their background. However, you still need to inform the buyer of what you’re trying to do. You’re going to need to rely on them to provide the information you need. This could be what your earn-out, your salaried contract, your buyout, etc.

Stay focused on the bigger goal

The due diligence process can be a very soul-crushing and emotionally draining time. It can drag on for months on end. You’ll be stressed out and can stir out various emotions. Most, if not all, buyers want you to get worked up because it is an advantage for them. The more frustrated and emotionally down you are, the higher their chance to beat your resolve.

The buyer’s goal in the due diligence process is to expose all the ugly sides of your business to validate a lower purchase price. You need to stay on your game and focus on your main goal, to sell your company at your price point; not theirs.

Conclusion

This concludes our top 6 tips and things you didn’t know about due diligence. We hope that this article has helped you learn something new about the subject. Good luck and always do your due diligence!