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Preparing your Business for Exit through Reverse Due Diligence

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Deciding to exit a business is a decision that is not taken lightly by owners, and once the decision has been made preparations should be strategic to ensure the highest price is obtained for the sale. This preparation should take the form of reverse due diligence. Reverse due diligence is a process of reviewing the business in the same way that a buyer would, by evaluating the business including its customers and employees.

Benefits of Reverse Due Diligence

There are three main benefits of reverse due diligence:

  • Deal with premediated issues. By the seller performing reverse due diligence it allows them to identify areas of the business that require improvements and ensure those improvements are completed prior to disclosure to the buyer.
  • Obtain the highest sale price. By performing reverse due diligence, it allows the seller to present the business as valuable as possible, as any potential issues that would have arisen later on in the transaction that would have resulted in a drop in sale price are ironed out early on.
  • Facilitate a smoother transaction. By dealing with anticipated questions from the buyer, the seller is able to collate evidence to support their answers, which ensures a more time efficient transaction.

Commercial and Employment Contracts

Of particular importance to exiting a business is ensuring that the commercial and employment contracts are in order. Commercial contracts are essential for the sale as the seller can provide copies of agreements that are material to the business, displaying future revenue streams and highlighting its profitability. Additionally, it allows the seller to make arrangements to bring to an end agreements which are stagnant and no longer benefit the business.

For employment contracts, it is key that the buyer is aware of the value and skills of the workforce currently employed by the business. Through reverse due diligence a business can decide whether a role is contributing to the business, and if it is not, start the process to lessen the workforce in preparation for the sale.

As the above suggest, sellers can add a substantial amount to the sale price by performing reverse due diligence as it ensures the contracts that are in place and the workforce employed by the business are adding to its value.

The information contained in this article is for information purposes only and is not intended to constitute legal advice. If you require further information our commercial team would be more than happy to assist you. Please contact us at [email protected] or call us on 029 2009 5500 to speak to one of our team.