What due diligence should companies do before they try to sell their company?

Takeaway: In anticipation of a sale of the business, companies should review financial records, ensure legal compliance, secure intellectual property, update customer and vendor agreements, keep employee records current, and address any environmental issues.

Selling a startup is an intricate process that necessitates meticulous preparation. One of the most crucial aspects of preparation is performing due diligence in anticipation of the diligence a buyer will conduct. This process is meant to identify and mitigate any issues that might deter potential buyers and decrease the value of your company. Here's what you need to know about anticipatory due diligence and how to properly prepare your startup for sale.

Financial Statements and Projections

Ensure that your financial records are accurate, up-to-date, and professionally presented. This includes balance sheets, income statements, cash flow statements, and any financial projections. Potential buyers will scrutinize your financial health to assess your company's profitability, stability, and growth potential. Discrepancies in these documents can raise red flags that may disrupt or even terminate a potential sale.

Legal Compliance

Review all legal aspects of your startup, including contracts, licenses, and permits. Ensure compliance with labor laws, intellectual property rights, and any industry-specific regulations. Non-compliance can lead to potential lawsuits, fines, or a purchase price reduction that could affect the sale. It's advisable to seek legal counsel to conduct a thorough review of your legal standing.

Intellectual Property

Your intellectual property (IP) assets, including patents, trademarks, copyrights, and trade secrets, should be duly registered and protected. A potential buyer will place significant value on your IP, so it's essential to demonstrate that your assets are secure and that you have taken the necessary steps to prevent infringement.

Customer and Vendor Agreements

Review all customer and vendor agreements to ensure that they are current, and there are no conflicts that could affect the sale. In particular, check whether any of your agreements require the consent of the counterparty in order to sell your business. Buyers want assurance that key customers and suppliers will continue their relationship with the business post-acquisition.

Employee Records and Contracts

Ensure that all employee records are up-to-date, and all contracts, including non-compete and non-disclosure agreements, are enforceable. Potential buyers will want assurance that key employees will remain with the company after the sale, and that there are no underlying labor issues that could affect business operations.

Environmental Issues

For some industries, ensuring environmental compliance is crucial. If your startup operates in a sector where environmental regulations apply, you need to confirm that your company is in compliance and there are no outstanding environmental issues.

Conclusion

Performing anticipatory due diligence can make the sale process smoother and more efficient, and ensure you present your startup in the best possible light to potential buyers. It's a proactive way to address any potential issues head-on and improve your chances of a successful sale. It also demonstrates your commitment to transparency and integrity, which can significantly enhance buyer confidence.