As more and more Australians reach retirement age, planning how to leave their business is a valuable investment – both in terms of time and money. One aspect of succession planning often overlooked by business owners is preparing for the due diligence investigation which any incoming party is likely to conduct on their business. Associate Giselle Finnane and Paralegal Elise Blume discuss why due diligence is such an integral part of a good succession plan and how you (as a business owner looking to exit your business) can go about preparing for the due diligence process. 

Why is due diligence a major part of your succession planning?

Due diligence is essentially an investigation of the business. Regardless of the context of transition – sale, transfer to a family member, moving into a partnership – it is more than likely that the new owner would want to conduct due diligence on the business operations to understand the potential risk involved. The process brings the value of the business to light, as well as its potential blind spots. Much like the building reports and pest inspections obtained when buying a house, any buyer of a business wants to make sure that the numbers stack up and that there are no significant issues or liabilities.

Due diligence is an integral part of any succession plan because sale opportunities often happen out of the blue. The thoroughness required to prepare a due diligence file can take considerable time and significantly delay negotiations. Therefore a due diligence file prepared well in advance of any sale offer means that you will be ready to exit when the opportunity arises and on the best available terms.

The ability to answer questions that potential buyers will ask and being able to provide documentary evidence when requested can make or break a deal. In our experience, transactions can fall over not because of the outcome of the due diligence investigations, but simply because the seller was unable to pull together the information in a timely fashion.

Preparing a file in advance allows you to work at your own pace without interfering with the day to day management of your business. It also allows you to take stock of the state of your business and more effectively plan your future strategy. When (or if) the time comes to sell, you can negotiate from a position of strength and not weakness.

What are the essentials of the due diligence process?

The due diligence process varies from business to business by reference to the unique requirements of the business. Irrespective of what your business may be, the key question you need to ask to begin your due diligence process is “what information would a buyer of my business require?”

The following is a list of typical information provided to a buyer in a due diligence file:

  • Short company history and service overview including a clear organisational chart;
  • Key relationships: key customers and key suppliers;
  • Important contract information;
  • Audited financial statements;
  • Corporate tax returns and assessments;
  • Key personnel – and why they will remain after sale;
  • Details of key systems, licence agreements and business processes;
  • A summary of the businesses’ capital asset summary;
  • Strategic plan, including financial projections.

Once you have identified what information is relevant to your business, the next step is to compile the file, delegate tasks and keep the file up to date and relevant.

How do you go about compiling and updating a due diligence file?

The key is starting early so that you can move at your own pace. This affords you time to comprehensively cover your business and avoid interfering with the day to day management of the business.

It is also best to structure the due diligence information in a logical fashion and to ensure that the information is informative, current and accurate. It is to the buyer’s benefit (and subsequently your benefit) if the information is easily digestible.

To start compiling the information follow these suggested steps:

  1. Ask yourself the following questions:
  1. “What information would a buyer of my business require?”; and
  2. “What questions would a buyer of my business likely ask?”
  1. Make a list of the above information and categorise the list.
  2. Create a folder with tabs for each category.
  3. Assign people within your business to each tab. Keep in mind that some parts of due diligence require expert assistance such as accountants, business advisors/business valuation expert or lawyers. It is a good time now to engage your expert team.
  4.      Start compiling the information.
  5. Put processes in place to ensure that the information is regularly reviewed and is kept up to date.

In summary …

Whilst the due diligence process takes time and costs money, the benefits of this investment cannot be underestimated. Thorough planning completed well in advance streamlines business transitions allowing you to maximise the price of your business and reduce transaction costs. Other benefits include:

  • You can spread the time and investment of the due diligence preparation work over a number of years
  • You can involve experts early thereby reducing professional fees
  • Any issues with your business can be identified and resolved
  • You can gain a greater strategic understanding of your business and plan accordingly
  • You can negotiate the sale of your business from a position of strength