The Due Diligence Phase: Preparing Your Business for Buyer Scrutiny, Part II

Transitioning a business under intensive buyer scrutiny is no easy feat. It takes a lot of work to position your hard work and legacy in such a way that convinces potential buyers that it’s a worthy investment. 

We’ve previously covered understanding the buyer’s perspective, achieving financial and operational readiness, and considering the legal and compliance issues you might encounter in Part I. Today, we’ll continue with that trajectory, discussing topics like physical assets and getting your documentation together.

It’s time to finish up strong, so when you exit your business, you’ll be more than ready for any buyer scrutiny you might encounter.

Physical Asset Evaluation

Tangible assets like machinery and real estate are the face of your business and first impressions matter. How your business’s physical assets look will give the potential buyer an idea of the state of your business before they get a chance to dig into financials or operations. 

Equipment and Inventory

Every piece of equipment, tool, or product in your inventory should be in prime condition before you even think about exiting your business. 

Buyers will have a keen eye for red flags like obsolete machinery or stockpiles of outdated inventory because  

these are red flags hinting at potential hidden costs to get the house in order as soon as they take over. Take a proactive approach to addressing these issues beforehand because it can make a world of difference in buyer negotiations.

Real Estate

Your business’s real estate, whether owned or leased, should also be at the top of your list for potential improvements. 

If you’re dealing with owned property, take care of any signs of neglect or areas needing maintenance. Buyers will quickly spot areas that might need significant repairs or renovations because of the potential added costs should they decide to move forward with the purchase.

For leased properties, you’ll need to have your contract terms ironclad, as buyers will want to know precisely what they’re getting into. It would be devastating to move through nearly the entire process, but the sale falls through because the property owner refuses to grandfather the new owner into the existing lease. 

Digital & Technological Assets

Considering all the different aspects of running a modern business that require some form of tech integration, it’s worth spending some time getting your digital ducks in a row. 

Website and/or Online Shop

With many storefronts moving to an ecommerce and brick-and-mortar model, your business’s online presence should do just as much to sell the value of your enterprise as your offices or shops. 

When you’re ready to transfer ownership, potential buyers want to know that your online resources provide things like:

• A positive, efficient user experience
• Navigability across devices
• Consistent branding
• High-value, well-written content

The same goes for your digital marketing strategy. Buyers want to see your online brand evolve over time while staying up to date with things like SEO for newer iterations of search engine algorithms and an engaged email list. 

Before putting your business out there, invest in a refreshed and up-to-date strategy that signals buyers that they can walk right in and leverage a fully functioning online presence. 

Cybersecurity

Cybersecurity threats are rising, with 83% of organizations reporting more than one data breach in 2022. You can set up your business for sale success by offering potential buyers reassurance that you have robust measures in place to keep hackers out of your systems/

• Regularly audit your systems and conduct security assessments to find vulnerabilities before some ne’er-do-well can exploit them. Buyers will appreciate records and certifications proving you have well-established, monitored processes to prevent breaches. 
• Have external experts validate your cybersecurity measures. That objective reassurance proves that your efforts are more than lip service to cajole more cash out of the sale. 
• A study from Stanford found that human error accounts for 88% of security breaches, so work with your staff to establish a workplace culture that reduces the risk of inadvertent data leaks or breaches. Keeping your team informed means they can recognize and thwart phishing attempts and other cyber threats, which will be a big relief for concerned buyers. 

Software and platforms

No buyer will look at outdated software and think, “Wow! I’m so excited to replace this out of my own pocket!” If you want your business to look attractive, you need to come to the table with software and platforms so that operations run seamlessly, even after you’ve exited. 

Start by updating to the latest version of whatever software you use. This gives your team access to new features while addressing potential security vulnerabilities.

You should also consider adopting cloud services because they are far more reliable and useful than physical storage. Potential buyers will put much more value on an easy-to-use online service that handles everything from data backup and disaster recovery to facilitating remote work than a more traditional system like jump drives or server rooms. 

Business Brand & Reputation

Your public image certainly includes your marketing efforts and brand style, but they. Still, it’s online reviews and your history of audience interactions that will set the tone for your business’s reputation in the eyes of both customers and potential buyers.  

Need proof? 

Ninety percent of customers are likelier to complete a sale after reading reviews about your business! You can trust that buyers will have that statistic in mind when they put your brand reputation under the microscope, so you’ll want to try cleaning up your online interactions before you put out the “For Sale” sign. 

If your brand image isn’t up to snuff, expect that to affect your business value. If it is, then maintain that reputation until you put your name on the final transfer contract by taking the following measures:

• Monitor Reviews: Tools like Google My Business, Yelp, and industry-specific review platforms allow businesses to track customer feedback. Regularly monitor and respond to these reviews, regardless of whether they’re positive or negative.
• Address Negative Feedback: Instead of ignoring or getting defensive about negative comments, take them as an opportunity. Address issues publicly, showing other customers (and potential buyers) that you take feedback seriously and are committed to resolving concerns.
• Optimize Positive Visibility: Encourage satisfied customers to leave positive reviews. Share customer testimonials and success stories on your website and social media channels.

Preparing Comprehensive Documentation

Before you put your business on the market, you must set up a clear and exhaustive documentation system that holds up to even the most intensive buyer scrutiny. We’ll go over the specifics of what to include in just a moment, but to put it briefly, anything and everything you can think of. 

Is it going to be tiresome and tedious? Yes.

Is it going to be an ongoing process that requires constant updates? Yes.

Is it worth starting now before you’re ready to exit? Absolutely.

Comprehensive documentation serves two purposes that will be a boon to the valuation of your business:

Firstly, it provides transparency so potential buyers know your business operations are above board.

Secondly, it offers a detailed history of every aspect of the business so the transition is as smooth as possible. It’s like creating an instruction manual proving your company is a well-oiled machine ready for the next phase of ownership. 

Create a Data Room

If you don’t have one yet, I cannot stress enough how important it is to create a data room, or a centralized repository, physical or virtual, where you store crucial documentation. 

Even if you’re not ready to sell just yet, creating a sacred space that lets you keep your paperwork organized means a lot less stress when you officially present your business documentation for buyer scrutiny. 

Anytime you upgrade, update, schedule maintenance, or pay a bill, put it in a dedicated folder in chronological order and watch your stockpile of proof of your business’s value grow!

When it’s time to start negotiations, a data room allows potential buyers to access and review documents during due diligence without disrupting day-to-day business operations. Putting the work into building your data room today means an expedited sale tomorrow, as it will minimize back-and-forths and reduce potential bottlenecks.

While the specifics will change according to what your business does, here’s a general checklist to consider when assembling your data room:

• Financial Records: This includes balance sheets, income statements, tax returns, and audit reports for the past few years.
• Contracts: All active agreements, be they with suppliers, customers, or employees, should be on file. This also includes any lease agreements, partnership deeds, or franchise contracts.
• Operational Procedures: Documentation detailing your business processes, workflows, and standard operating procedures will provide invaluable insights into the day-to-day running of your business.
• Licenses and Permits: Any necessary licenses, certifications, or permits that validate your business’s legal operating status.
• Employee Records: Information regarding employee contracts, benefits, and any other pertinent human resource documentation.

Don’t Forget Confidentiality Agreements!

Sharing in-depth details about your business with outsiders can be risky, so before anyone peeks at your data room, ensure you have non-disclosure agreements (NDAs) on file. 

These legally binding documents ensure that potential buyers can’t misuse or disclose the information they come across during the due diligence phase, lest they face legal ramifications outlined in the agreement.

Final Thoughts on Preparing for Buyer Scrutiny

No matter how incredible you are at running your business, exiting it is a whole new ballgame jam-packed with complexities best handled by the experts.

Lori Moen of Catalyst Group ECR is a certified exit coach with a treasure trove of experience and personalized strategies that could be the difference between a miserable, drawn-out exit and a phenomenal one. Lori is committed to helping business owners set their buyers up for success, turning their dream of leaving a lasting, entrepreneurial legacy into a reality.