Common due diligence mistakes for business sellers and how to avoid them

Due diligence mistakes

Due diligence is a critical step in any business transaction. It ensures that all facts and figures are checked before a deal is sealed. However, despite its importance, many sellers fall into common traps that can complicate transactions, lead to unfavourable outcomes, or stop the transaction from progressing.

Here, we discuss the most common due diligence mistakes made by business sellers during the due diligence process and provide straightforward advice on avoiding them.

1. Insufficient preparation

Mistake: Many sellers enter due diligence without adequate preparation. This often results in scrambling to gather necessary documents and information last minute, which can lead to errors and delays.

How to avoid: The decision to sell your business should not be a quick one. It requires thought and care. Once you have decided to sell, start preparing as soon as possible.

Gather and organise as much of the key documentation covering critical aspects of the business, including but not limited to; accounting and tax information, business contracts, governance documents, employee information, company policies, pension details etc, well in advance of any potential sale.

Ideally, all of this stuff should be up-to-date and easily accessible. If it is not, think about getting your affairs in order before trying to sell your business; as this could substantially delay the deal.

2. Overlooking key information areas

Mistake: Sellers sometimes focus too heavily on financial data, neglecting other vital areas such as legal compliance, environmental issues, or employee contracts.

How to avoid: Develop a thorough due diligence checklist that covers all aspects of your business, not just the financials. Legal, environmental, operational, and human resources aspects must all be scrutinised with equal importance. Remember, a serious buyer will want to know as much detail as they can about your business.

Not sure what you need to prepare? We are happy to talk this through with you. Contact us here.

3. Failing to conduct a thorough risk assessment

Mistake: Don’t underestimate the need for a detailed risk assessment to assess potential red flags or issues that could affect the deal later on.

How to avoid: Engage in comprehensive risk analysis. Evaluate all data for potential risks and prepare strategies to mitigate them. This might involve consulting with various advisors for an accurate and comprehensive evaluation of each aspect of your business.

4. Not involving the right experts early enough

Mistake: Sellers often delay involving legal, financial, and industry-specific advisors until they’re in the due diligence process. This will almost certainly result in missed details, rushed evaluations, and deadlines not being met.

How to avoid: Engage with a team of specialised advisors early in the deal process. This includes lawyers, accountants, and sector-specific consultants who can identify issues that may not be apparent at first glance. Early involvement allows for a more detailed and informed assessment and the more proactive you are, the more you can help your advisors do their jobs to the best of their ability, simultaneously helping lead to better outcomes and lower costs, for you.

5. Ignoring third-party dependencies

Mistake: Failing to evaluate the impact of third-party relationships, such as suppliers and key clients, can obscure potential risks, especially if the business heavily relies on external partners.

How to avoid: Review and get on top of the terms and conditions of your contracts with critical suppliers and customers. In some circumstances, these contracts may be the cornerstone of your business’s success and the key to its future growth. Assess the stability and duration of these relationships and consider conducting third-party assessments to verify their health and sustainability.

6. Overlooking regulatory and compliance issues

Mistake: Sellers may not fully consider the regulatory landscape, especially if expanding or merging into new geographic, product, or service markets.

How to avoid: Thoroughly review compliance with local, national, and international regulations. This is crucial in sectors like healthcare, finance, and telecommunications, where regulatory compliance is stringent. Engaging compliance experts to evaluate all regulatory obligations and potential liabilities of your business can help you sort issues out before a buyer identifies them, which could help prevent any potential reduction in the sale price.

Contact us if you need advice on regulations and compliance.

 

Ensure comprehensive due diligence for a successful business sale

Proactive engagement in the due diligence process is essential to avoid common pitfalls.

Contact us today for expert guidance and support throughout your business transaction.

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info@rubric.law