DUE DILIGENCE

This has been taken from Mark Corke's newsletter (with his permission of course!). Mark is the owner of Suitegum and is a Business Broker. Mark regularly holds seminars, on how to get your business ready for sale and keep it that way. For more information have a look at Mark's website www.suitegum.co.za.

Businesses change hands every month. Somewhere in South Africa, right now, the final touches are being put to a deal that will see the ownership of a business changing at the end of this month. The transfer of ownership in a business is nothing rare, strange or untoward. Deals happen all the time. However, if deals were better structured and planned, the value of deals we see being done would be much higher. Let's see how we can improve our chances of successfully selling our business, shall we?

A Due Diligence Can Hurt
The accepted norm is that a prospective purchaser is allowed into a business to "do a due diligence" before making an offer of purchase. If he is happy, he makes the offer, based on his findings, and both buyer and seller move forward.

But what if he is not happy? Well we expect that the negotiation will be a bit tougher for the seller, and the price will be lower, if in fact the deal is closed at all. If the deal is not successfully closed, an enormous amount of information has been made available to the purchaser, all of which can then be used in competition to the seller! Tell me if the following isn't a better way of doing things:

Define "happy" up front.

The buyer will be happy if the seller can prove to him that the turnover is indeed R5M, the gross profit as a result really is R2M, and after all expenses, the earnings before interest, tax, depreciation, amortization and dividends (EBITDAD) is no lower than R1M - the amount promised in the original advertisement. The seller, on the other hand will be happy when the purchaser pays him his money, and takes the business.

By placing a clause to this effect into an agreement of sale as a suspensive condition of sale, or condition precedent, the agreement is a done deal as far as the seller is concerned, because of course, he knows that his figures are accurate. The purchaser should be satisfied in signing an agreement in which the seller has made a promise he is capable of keeping, and so should not have a problem paying a deposit.

If you can get your head around that concept, you can go a step further and actually sign an agreement of sale prior to the due diligence, in which you make the successful due diligence a suspensive condition of sale, or a "condition precedent". Stay with me on this, and I'll show you how to sell your business as painlessly as possible.

CheersMark Corke

What am I trying to achieve through this newsletter?Every single day of my life, I am, or one of my brokers is, approached by someone who wants to sell his business - and he wants to do it tomorrow, usually by lunch time! Trying to sell a business that is not prepared for sale does the business, the seller, and eventually the buyer a great disservice. If I can help business owners to get a grip on what is required in the event a business is to be sold, then that will make my job easier, and my clients will make more money in selling their businesses; and after all, isn't that what we all ultimately want?

We make money from day to day, sure; and the business puts food on our tables, pays the rent, and hopefully gives us a bit of status, but if you believe that it will never be sold, you are selling yourself short. So why not add a million or two to your net worth, and do the job properly? I'm certainly not suggesting that you crook the books to achieve this. You can add serious value to your business in a sale by preparing things properly, and by turning your business into a "product", just as you would make your business's own products or services attractive to your customers. Let me tell you how.