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Useful Questions to Ask Before Due Diligence

    

A lot of the information that is currently available regarding due diligence relates to the actual investigation process and the type of information that prospective investors will request and review. However, for a company that is looking to sell, there is quite a bit that has to happen before it will even get to this point. It is never wise to try to embark on a sale of your company and subject yourselves to an external due diligence investigation without first engaging in a bit of internal due diligence. Here are some important questions to ask yourself about due diligence beforehand to avoid succumbing to a potentially disastrous situation:

Are the finances really in order?

This is hands down the most important assessment that must take place prior to soliciting buyers. It does not matter how amazing a business may seem in theory. If the actual numbers are not available and do not exist on paper, any alleged value is essentially meaningless. All prospective buyers are going to be interested in the company’s past financial performance, current financial status, and projected earnings. This means that there must be detailed and ideally audited financial statements, an accurate balance sheet, and appropriate tax and accounting records, among any other items that are pertinent to the company’s financial picture.

What are the potential barriers?

The benefit to conducting an internal assessment in advance is that it will reveal any potential issues to a sale and due diligence investigation. Hopefully, this will then afford the company ample time to rectify any identified deficiencies. It is important to examine all facets of the company’s operations, finances, employment matters, vendor relationships, clientele, and so forth to figure out whether there are any red flags in need of addressing. It is far from ideal to have any issue, no matter how seemingly trivial it is, to become the reason that a good offer gets yanked off of the table.

Are there any specific deal breakers?

This particular question is not really about the issues that buyers may have but the aspects or traits of the buyer or terms of a deal that would cause the company to reconsider its desire to sell. It is important to think about what it is that the company is hoping to gain from the sale and whether there are any specific deal breakers. There is no sense wasting anyone’s time if everyone at the company is not on the same page as to what constitutes a good offer or the right deal. Thus, just as the company leaders must gather and analyze what it is that buyers will want to see, they must also agree on what it is that they collectively would be willing to consider.

Is the documentation there?

To conduct due diligence in a manner that lives up to the true connotation of those two words, there is going to be a lot of information requested and exchanged. Companies that engage in frequent mergers or acquisitions will likely have drafted their own version of a due diligence checklist that is provided to the targeted businesses. These checklists are usually broken down into broad categories of documents which are further divided into even more categories of documents. It would be wise to consult an example of these checklists and determine whether your company has the requisite documentation on hand. Hopefully, your company will have employed a detailed document retention and management strategy prior to this, but if not, this would be a great time to invest in a virtual data room to facilitate that aim.

What do the professionals have to say?

As your company is pondering these questions and analyzing its readiness for a sale, it is also a good idea to begin making connections with various professionals, ideally those who have experience with the kind of deal you are seeking as well as your type of company. In most cases, bankers, accountants, and lawyers will be needed, and it is never too early to engage these experts in the process. They can help with much of the aforementioned analysis and provide their expert opinions on whether the company is in fact in a good position to pitch a sale or what sort of things must happen before that is pursued.

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