Seller Beware – Due Diligence Critical When Evaluating the Buyer for Your Business - VR Business Sales Blog

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Wednesday, November 4, 2009

Seller Beware – Due Diligence Critical When Evaluating the Buyer for Your Business

JoAnn Lombardi
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Normally when the buying or selling of a business takes place, the buyer only performs due diligence. However, smart sellers know that it’s a two-way street. Let’s be honest, for both parties, it’s important to truly understand each other, to make sure that the other has a good head on their shoulders and everyone is on the same page. Most importantly, the seller doesn’t want to get burned. Nothing could be worse than when you put your heart and soul into growing a business; then selling it to a con artist that “pays” you with a small lump of cash and large pile of worthless stock certificates.  

KNOWING THE RISKS
  
 
The seller has a lot to risk. Of course, if you sell your business for 100% cash, you risk very little. However, this is a rare scenario. You are likely to have your compensation based on the stock of the buyer.  
 
In a way, selling a business is similar to buying stock for a portfolio: the seller wants a stock that will grow. But a seller should have information before hand regarding a prospective buyer, instead of having to start from scratch your background checks. Therefore, the seller should set up their own screening criteria and keep in tune to the marketplace. By the time the seller is approached, there will be no need to scramble and investigate.  
 
In performing due diligence, the seller should employ the same checklists as the buyer and ask equivalent questions. Areas of emphasis include the following:  
 
Finances
Has the buyer’s growth been better than their peers? Search for danger signs such as increasing receivables; and find out how much cash does the business have? Do they have enough to pursue the goals? Additionally, perform a rational analysis on the business.  
 
Strategy
Do you believe in the buyer’s goals and strategies?  Do you think the business is headed in the right direction? Does the buyer have a history of M&A strategy? If so, how have the acquired businesses or “brands” fared?  
 
Products/Services
Does the business have a competitive product line? Will your product line enhance the business’ growth?  
 
Management
Do you think the buyer has a strong management team? Do they have prior experience with growing strong businesses?  
 
The last two areas of questions are critical. Unfortunately, many sellers do not ask them. You want to make sure that your business is in capable hands. You want a buyer that will help grow your business. Never be afraid to ask “due diligence” questions. If the buyer is resistant, then this is an ominous sign that you may be dealing with the wrong candidate.

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