When selling your business, there are a combination of important elements you need to consider which create a seamless process to ensure your future success – one of which being Due Diligence.

For business owners creating, or considering creating a succession plan ahead of a sale, understanding the purpose and process of due diligence is vital.

Due diligence has a role in verifying the value of a business and acts as a safeguard against any pitfalls and potential surprises that could surface during the sale.

This article explores all aspects of due diligence, the importance of conducting thorough due diligence during an exit strategy, the option of carrying out reverse due diligence and the benefits of having GS Verde Group’s multi-discipline team guide your business through the process under one roof.

Defining Due Diligence in Business Transactions

Due diligence is a powerful tool for a potential buyer as it provides further understanding of a target business's long-term viability and overall value – helping to make more informed decisions.

As explained in an article by Corporate Finance Institute, the role of Due diligence is to analyse a business’s legal, financial, operational, and commercial status and is typically conducted by a potential investor and buyer. Due diligence is essential for identifying potential risks including legal disputes and financial discrepancies, verifying and obtaining information, providing the buyer with a clear understanding of the business’s value and future potential.

As well as assessing a target business’ historical performance, due diligence involves lawyers, accountants and industry experts thoroughly examining the seller’s growth potential, future risks and market conditions.

With its robust approach to uncover any risks that buyers need to be aware of ahead of a transaction, due diligence influences fair negotiations and builds a strong foundation for the deal.

There are several types of due diligence, including:

• Legal: This type of due diligence analyses the seller’s legal documents such as contracts, regulation compliances and any potential or ongoing litigation.

• Financial: This scrutinises the target company’s financial health by analysing its records, revenues and tax returns.

• Operational: Operational due diligence examines process efficiency within a target company.

• Commercial: Commercial due diligence looks at the seller’s position in the market and its potential for future growth.

• Technical: This type of due diligence examines the health of the seller’s technologic systems, IT, Intellectual Property (IP) and hardware.

Each type of due diligence has been designed to help limit risk, strengthen the negotiation stage of a transaction and ensure that both parties have a fair outcome.

At GS Verde Group, we customise the due diligence process to ensure informed decisions are made while providing extensive legal and financial support to make sure no important details have been overlooked during the process.

Steps Involved in the Due Diligence Process

Though the process of due diligence can be time-consuming, it can have a timeframe of several weeks or months depending on the target business’s size and complexity.

An article by Neotas clearly demonstrates how crucial of a role due diligence plays in the lead up to a transaction. It is the stage where accuracy, transparency and honesty define the process and where a ‘bigger picture’ is painted for both parties ahead of making negotiations. By uncovering any potential risks early, both parties can go into a transaction knowing they have safeguarded their assets and investments.

At the start of the due diligence process, a buyer will make a formal request to gain access to a wide variety of documents from the seller.

• Financial statements: These statements will usually contain details of the seller’s salaries, employment agreements, revenues, profits, expenses, benefits and an insight into labour costs and workforce stability.

• Legal contracts: The contracts display the target company’s partnerships, obligations and the leases and contracts of its suppliers.

• Tax returns: Tax returns have a role in showcasing the seller’s obligations and compliances when it comes to tax, in addition to any outstanding issues with tax authorities.

• Employee records: This defines the details of an employee’s pay, benefits, agreements with the company in order to provide an insight into the workforce stability and labour costs.

• Customer data: This data includes information relating to key customers and sales agreements to help gauge revenue streams.

After receiving these materials, the buyer and their advisory team will carry out an extensive review on the seller’s:

• Financial health

• Legal standing

• Operational efficiency

• Market positioning

Each of these steps aim to provide the buyer and their advisory team with a clear understanding and outlook of the seller’s financial health. The review will also detect if there are any potential risks and discrepancies to help validate the value and make sure all information has been portrayed accurately.

When the process of due diligence concludes, the buyer is able to produce a final report, which enables both buyer and seller to bring up any issues that have been identified and correct them ahead of the deal. This will pave the way for future negotiations or finalising the transaction.

How to Prepare Your Business for Due Diligence

To help navigate the process of due diligence and enable a successful transaction, thorough preparation is key.

Reverse due diligence is an effective way to conduct a self-assessment of your company's financial and legal health before officially beginning the due diligence process. By choosing to conduct reverse due diligence, business owners can prepare and organise their company's up-to-date financial documents, legal contracts, and operational data to reduce the chances of delays.

Being ahead of the game when it comes to unresolved matters or pitfalls within the company – such as financial inconsistencies and unresolved legal matters – will ensure a smooth due diligence process.

Ensuring these documents are ready to be analysed and up to date will bode well for both parties, as the buyer will see that the seller is organised and transparent – playing a significant role in building and cementing trust. It also provides sellers with the opportunity to be proactive and correct existing issues beforehand, so they can walk into the due diligence phase of the transaction with confidence.

At GS Verde Group, we guide business owners through the due diligence process by conducting reverse due diligence. The expertise and extensive knowledge of our multi-discipline team allows sellers to identify any potential risks and strengthen their negotiating position to ensure a seamless due diligence process.

Key Areas of Focus During Due Diligence

Buyers focus on several critical areas during due diligence to ensure the seller represents its business accurately and honestly.

The CEO’S right hand lays out in its’ article the main checklist for what to prepare for regarding each area of due diligence. Knowing that due diligence focuses sharply on financial and legal documents, along with examining each area with a fine-tooth comb, will fill both parties with confidence and reassurance.

Financial health:

The financial health of a company is the first port of call of examination, with buyers reviewing the target business’s:

• Profit margins: This provides insightful information about a business's profitability.

• Cash flow: Highlights the company’s liquidity and ability to meet expenses.

• Debt levels: This examines the company’s debt levels, as the risk of having high debt levels can indicate financial instability.

• Tax documents: This is analysed to ensure compliance in place, as well as checking for any outstanding liabilities that could affect the deal.

• Reviewing budgets and forecasts: This phase provides an understanding for the buyer regarding the seller’s financial outlook and considers its growth projections based on previous financial performance.

Legal status:

Another important area is conducting an examination on a target business’s legal status. From this, buyers will be able to evaluate the seller’s:

• Contracts: These will display the seller’s obligations, terms and any potential liabilities.

• Intellectual property (IP): Intellectual property is a crucial area to investigate as it looks at patents, trademarks, designs, titles, and copyright. It’s important to make sure that the seller clearly owns its IP and has protected it to avoid potential ownership disputes post-transaction with the buyer.

• Compliance with industry regulations: This examination looks to see if there are any unresolved lawsuits or violations to avoid fines or penalties after the completion of the deal.

Operational efficiency:

Within this area of due diligence, buyers are able to see how effective the seller’s operational systems are and how they run. Having a strong and seamless operational system makes a business more attractive within a competitive market. These include:

• Workforce effectiveness: This assesses the productivity, management capabilities and skill set of employees within the seller’s company.

• Supply chain reliability: This evaluates the efficiency and stability of the seller’s production, sourcing and processes within distribution.

• Technology and automation: This examines the software and systems used by the seller for its daily operations, including automation for cost reduction and efficiency increase.

• Process optimisation: This examines the quality of the seller’s streamlined operations and its role to maximise output and reduce waste.

Scalability: This is an important aspect for a buyer to uncover, as this determines whether the quality of the current operational model will be able to cope with growth plans or an increased demand post-transaction.

Commercial Viability:

Within this area, the buyer will be able to evaluate the seller’s:

• Market position: This evaluation will provide a great insight into the target company’s position and strength within a competitive market.

• Customer base: Examining the seller’s loyal customer base will demonstrate its reputation, its stability regarding revenue and potential for future growth.

• Competitive advantage: The seller’s competitive advantage demonstrates its ability to enhance and maintain market share – which makes the company more appealing to buyers.

Potential Pitfalls and How to Overcome Them

Just as it’s important to be aware of the positive outcomes of due diligence, both parties need to be aware of potential pitfalls and unexpected challenges that can come from the process and the best ways to overcome them. These can include:

• Undisclosed liabilities: Hidden debts and unpaid taxes, for example, can significantly reduce the value of a business prior to negotiations. To avoid this, sellers can conduct reverse due diligence to scan for any overlooked liabilities and if any are found, declare them beforehand. It is in the seller’s best interest to be upfront with the buyer to build trust and a solid professional relationship.

• Overstated revenues: Being open, honest and transparent is key when it comes to your business’ financial figures, as buyers can spot inconsistencies which can result in reduced offers or the deal collapsing completely. The best approach is making sure that your financial records are accurate and checked thoroughly before beginning the due diligence process.

• Dependencies on key clients: Ensuring that your business has a reliable and loyal client base will be beneficial in the long run, rather than relying heavily on a few clients which could affect your business’s stability. To mitigate any risk, diversify and grow your client base, build strong relationships for future success and provide documentation to demonstrate your growth efforts for reassurance.

Due Diligence: Expert advice GS Verde Group

Advanced preparation, transparency and accuracy regarding due diligence is key to enhancing the trust between both parties to create a successful transaction.

GS Verde Group provides expert guidance and advice to help navigate the due diligence process, including reverse due diligence, so business owners can enter negotiations with confidence and have a successful outcome. Our ‘one-team’ approach will help your business through the process, reduce risks and make informed decisions.

Our multi-discipline team extends their expertise across all types of due diligence – including financial, legal and technical - with our advisory services designed to protect your business's legacy and help you achieve long-term success.

At GS Verde Group, we specialise in helping business owners navigate the complexities of due diligence. Our tailored advice ensures that you are equipped with the knowledge and support needed to make informed decisions at every stage of the process. Whether you’re just starting to consider selling or ready to start sale negotiations, we are here to help you exit with confidence and integrity.