Preparing Your Business for Due Diligence: What Buyers Want to See

Introduction

Selling a business is often the culmination of years of hard work, investment and growth. However, when a potential buyer is reviewing a business, they are not only looking at your revenue and profitability, they are also assessing risk.

Due diligence is one of the most important stages of a business sale. It allows a buyer to verify the information provided by the seller, identify potential issues and determine whether the business is worth acquiring and, if so, on what terms.

For sellers, being prepared for the due diligence process can make the difference between a smooth transaction and a delayed or abandoned deal.

What is due diligence?

Due diligence is the process by which a buyer investigates the legal, financial, operational and commercial aspects of a business before proceeding with the transaction.

The purpose of the process is to confirm that the business is what it appears to be and to identify any risks that could affect its value.

While every sale and due diligence process is different, buyers will commonly review:

• corporate structure and ownership;
• financial records;
• material contracts;
• employees and employment arrangements;
• intellectual property;
• customers and suppliers;
• property arrangements;
• regulatory compliance; and
• litigation and disputes.

Related Article: The Importance of Due Diligence when Buying an Existing Business

What Buyers Are Looking For

Clear Ownership and Structure

Buyers want certainty that the seller has the legal right to sell the business and that ownership arrangements are appropriately documented.

Issues that may raise concerns for buyers include:

• outdated company records;
• unclear ownership of shares or assets;
• undocumented arrangements between founders and business partners; and
• the absence of a shareholders agreement (where one would be appropriate).

Buyers want confidence that there will be no competing claims over ownership after completion.

Strong and Transferable Contracts

Contracts are often central to the value of a business. Buyers will assess whether key customer, supplier and partnership contracts can continue after the sale.

Buyers are often concerned if:

• contracts can be terminated on a change of control or if consent is required for a change of control;
• agreements are not documented;
• there are unfavourable commercial terms; and
• the business relies on informal arrangements.

Businesses that rely heavily on informal agreements may appear riskier to buyers than businesses with written contracts in place.

Protection of Intellectual Property

Intellectual property is one of the most valuable assets of a business.

Accordingly, buyers will want to confirm that the business owns or has appropriate rights to use:

• trade marks;
• websites and domain names;
• software;
• confidential information;
• branding materials; and
• content and other business assets.

A key issue that is often found during the due diligence process is intellectual property that is created by individuals, such as founders, contractors, employees or third parties, not having been properly transferred to the business.

Employment and Contractor Arrangements

While employees and contractors are a significant part of any business, employment issues can create significant risk.

As part of the due diligence process, buyers may review:

• employment contracts;
• contractor arrangements;
• workplace policies;
• employee entitlements; and
• compliance with workplace laws.

Issues such as the misclassification of contractors, undocumented arrangements or unpaid or underpaid entitlements can create liabilities that the buyer may be unwilling to assume.

Legal Compliance and Risk Management

Before committing to buying a business, buyers want to understand whether the business has operated in compliance with its legal obligations.

Potential concerns identified during due diligence include:

• unresolved disputes;
• regulatory breaches;
• inadequate licences or permits;
• privacy or data compliance issues;
• customer complaints; and
• outstanding claims.

The more uncertainty a buyer identifies during due diligence, the more likely they are to seek additional protections in the contract of sale, request a reduction in the purchase price or ultimately, reconsider the transaction.

What Commonly Kills Deals?

While every transaction is different, certain issues repeatedly lead to problems during the due diligence process.

Poor Record Keeping

Buyers can lose confidence in the transaction and the business when there are missing documents, inconsistent records or unclear arrangements.

Even where missing documentation is not the result of an underlying problem, the inability to provide supporting documentation can create uncertainty and undermine buyer confidence.

Undocumented Agreements

While many businesses rely on informal arrangements with customers, suppliers, employees or business partners, this may not be sufficient for a buyer.

These relationships may work on a day-to-day basis, however, buyers need certainty that key arrangements will remain in place after completion.

Ownership Issues

Disputes over who owns shares, assets, intellectual property or customer relationships can significantly delay or prevent a sale.

Hidden Liabilities

Hidden liabilities, including unpaid obligations, compliance failures or unresolved disputes, can affect negotiations and the transaction.

Transparency during due diligence is crucial, and buyers are generally more comfortable addressing known risks rather than discovering undisclosed issues later.

How Sellers Can Prepare

Business owners can strengthen their position when selling a business by preparing for the due diligence process well before putting the business on the market.

Practical steps that can be taken include:

Organise Key Documents

Maintain clear records regarding the business including corporate documents, contracts, intellectual property registrations, employment records and financial records.

Review Contracts

Identify important agreements and check whether they contain provisions such as termination rights or change of control provisions that may be triggered by a sale.

Address Issues Early

Where possible, resolve outstanding legal issues before commencing the sale process. If an issue cannot be resolved before the sale, address it with the buyer from the outset to help preserve value and minimise unnecessary negotiations.

Protect Your Intellectual Property

Ensure valuable intellectual property is properly owned, registered (where appropriate) and documented.

Obtain Legal Advice Early

Obtaining legal advice before commencing the due diligence and sale process can help identify risks and allow sellers to address issues before they become deal breakers.

Conclusion

A successful business sale is not just about finding a buyer, it is about demonstrating that the business is ready to be sold.

Businesses are better positioned to achieve strong outcomes when they have prepared for the sale, maintained proper documentation and proactively managed legal risks.

Preparing for due diligence before approaching potential buyers gives sellers the best opportunity to showcase the value of the business. This can also increase buyer confidence, reduce delays and improve the likelihood of a successful transaction.

View our Due Diligence Checklist.

This checklist can set out some of the common items that are often considered during the due diligence process.

Additional resources

Frequently asked questions