When it comes to selling a business, thorough preparation and transparency are crucial to ensuring a successful transaction. Financial due diligence, traditionally the concern of buyers, is increasingly recognized as a vital step for sellers too. Conducting their own financial due diligence not only helps sellers better understand their business’s financial health, but also positions them to maximize value, facilitate a smoother sale process, and achieve strategic advantages in negotiations.

Benefits of financial due diligence for sellers

Sellers should consider conducting financial due diligence in anticipation of a sale for a number of reasons, including:

1. Supporting a realistic valuation

   A realistic and defendable valuation is central to negotiating a sale, however, around half of business sales encounter problems during the transaction process due to valuation issues. Through financial due diligence, sellers gain a comprehensive understanding of their company’s financial health, including revenue trends, profitability, and cash flow issues. This deep dive not only supports a valuation with concrete data but also helps in substantiating the asking price to potential buyers. Financial due diligence helps narrow the gap between the asking price and initial offers.

2. Streamlining the sale process

   Sellers who undertake financial due diligence usually have a smoother transaction process and tend to close faster. Preparation can reduce the time to close by weeks as sellers have all the financial records organized and analyzed, allowing them to provide quick and comprehensive answers to any queries from potential buyers. This readiness not only shortens the due diligence period but also builds trust with buyers, demonstrating transparency and management competence. It also reduces the likelihood of surprises during the buyer's due diligence that can lead to renegotiations or even collapse of the deal.

3. Enhancing negotiating position

   Armed with a thorough understanding of their business's financials, sellers are better positioned to negotiate terms. This includes not just the price but other critical elements of a deal, such as payment structures, timelines, and warranties. Empirical data supports that sellers who maintain a firm grasp of their financial situation through due diligence can command better terms, justifying their valuation confidently and negotiating sale prices closer to their initial asking price.

4. Building credibility with buyers

   Ultimately, a seller who has conducted thorough financial due diligence presents a more credible and reliable business proposition. Buyers are more likely to trust the data and projections provided when they know the seller has diligently reviewed and prepared the financial statements. This trust can be crucial in competitive sale processes where multiple parties may be interested in acquiring the business.

Invest in financial due diligence for the sale of your business

While financial due diligence requires an investment of time, resources, and money, the benefits it brings to a business’s sale can far outweigh these costs. For sellers, conducting financial due diligence is not just about uncovering potential issues, but about actively enhancing the value and attractiveness of their business. By taking control of this process, sellers can drive the sale towards a successful and smooth closing.

If you have any questions or would like to discuss other ways to prepare for the sale of your business, please contact Ardi Nugraha at anugraha@citrincooperman.com or Citrin Cooperman’s Transaction Advisory Services Practice Managing Partner Sylvie Gadant at sgadant@citrincooperman.com.