Why business sellers should do vendor due diligence

Posted by James Price | JPAbusiness on 22-Aug-2018 02:00:00

Runner preparing

When business owners come to see us, wanting to sell their business, we often get involved in providing what we term ‘vendor due diligence’.

Vendor due diligence has two main components:

1. Understanding what my business is really worth

This is something we have covered previously in eBooks and blogs about business valuation and market appraisals.
It involves getting independent advice on what your business is really worth in the market, on a realistic, fair value market basis.

2. Understanding how my business appears to a potential purchaser

This is the core part of vendor due diligence and involves looking at the business from a purchaser’s point of view. Taking the purchaser’s perspective means thinking:

  1. What is this business really about? What exactly does it do?
  2. What key pieces of information would a buyer need to see to be able to assess this business in terms of business value and business risk, and potential return?
  3. How do I go about documenting that information so my business is presented fairly, objectively, robustly, yet in its best possible light?

Stage 1 – What is my business worth?

As a seller, you may ask: do I really have to go to the trouble of doing vendor due diligence?

In terms of the first stage – the market appraisal – our short answer is ‘yes’.

We believe it would be false economy not to get a valuation or appraisal upfront, because otherwise you’re flying blind as to what the market will really pay for your business (even though, as we always say, valuation is not an exact science).

Stage 2 – How does my business appear to buyers?

The next stage – detailed vendor due diligence prior to going to market – is a judgement call by vendors.

For the business owner who is looking to maximise value in the sales process, and ensure the transaction process is streamlined and as effective as possible in their favour, I suspect it is a fairly easy call to make.

Detailed vendor due diligence is about smoothing the communication process.

It’s so disappointing to see a purchaser and vendor sit down together, then watch as both become frustrated because the information needed is sitting in the vendor’s head.

The vendor gets frustrated because he/she has lived the business for so long they think this information should be obvious to everyone.

The purchaser gets frustrated because they can’t readily and easily access the information they need to make an informed decision.

As a seller, conducting vendor due diligence with an independent advisor’s support will ensure all that critical information in your head is ‘extracted’, collated and clearly presented long before purchasers come knocking.

This preparedness for sale is a critical component of maximising value on exit.

If you would like support with any aspect of selling your business, or preparing it for sale, contact the team at JPAbusiness on 02 6360 0360 for a confidential initial discussion.

 

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JAMES PRICE | JPAbusinessJames Price has over 30 years' experience in providing strategic, commercial and financial advice to Australian and international business clients. James' blogs provide business advice for aspiring and current small to mid-sized business owners, operators and managers.

 

Topics: Selling your business, selling a business, Business valuation, vendor due diligence, business valuer

 
Disclaimer: The information contained in this blog is general in nature and should not be taken as personal, professional advice. Readers should make their own inquiries and obtain independent, professional advice before making any decisions, taking any action or relying on any information in this blog. 
 
 

 

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