A deal isn’t done when the terms are agreed to in an LOI and is still subject to further due diligence at that point. An acquirer will want to do a detailed review of almost every aspect of your company’s operations. Below are a few of the most common issues that come up in due diligence, and steps that you can take to prepare before you start a sale process.
- Financial statements: Consider bringing in an outside accounting firm to perform a financial review, an audit, or a sell-side quality of earnings report, which may uncover issues in advance and will give a buyer a greater level of comfort in the numbers. Most buyers will still also undertake a buy-side quality of earnings review in final due diligence, but having been through an audit generally makes the quality of earnings process considerably easier. If you aren’t already doing so, we would also strongly recommend completing a full monthly close on your financial statements so that you can track TTM (trailing twelve month) results on a rolling basis and have greater visibility into business trends and seasonality.
- Sales tax: State sales tax obligations have grown increasingly complex following the Wayfair decision and subsequent regulation. Unless there are clear exemptions for your products or services, it may be a good idea to complete a sales tax nexus study to check if there are any states where you should be paying tax but aren’t. If you rely on customer exemptions, obtain copies of exemption certificates for each customer.
- IP review: Evaluate how you are protecting your unique product designs, processes, or other internal know-how. If applicable, speak with an IP attorney about whether it makes sense to apply for a patent or a trademark, or whether a Freedom To Operate (“FTO”) analysis may be beneficial. Ensure that you have signed invention assignment and confidentiality agreements from all employees, particularly those who may be involved in developing IP.
- Employee classification: Review the factors determining status of exempt vs. non-exempt employees and independent contractors with an employment specialist to be sure that they are correctly categorized.
Beyond these specific areas, it may also be helpful to organize your company’s records (corporate documents, customer contracts, employment contracts, etc.) in a central location, so that this information can be easily compiled and shared when it is needed. An acquirer will generally want to see complete electronic copies of all material contracts which are fully executed by all parties and include any associated exhibits or appendices.
Mirus often begins its advisory role well before a sale process begins, and we are happy to provide further guidance on how best to prepare a business for sale.
Kate Soto is a partner with Mirus Capital Advisors. She works with owners of middle market businesses and can be reached at email@example.com.