Navigating Due Diligence in Business Sales: Overcoming Common Obstacles
Navigating Due Diligence in Business Sales: Overcoming Common Obstacles
When selling a business, the due diligence (DD) process is a pivotal step in ensuring a smooth transition from seller to buyer. Having observed many transactions, a business broker often sees deals stall or even collapse during this phase due to common challenges.
These hurdles, if not properly managed, can cause frustration for both parties and potentially derail the entire sale. Here, we explore three of the most significant obstacles encountered during due diligence and offer advice on how business owners can help prevent these issues from arising.
One of the biggest challenges during due diligence is a misalignment of expectations between the buyer and the seller. Often, buyers expect full access to financial records, while sellers may feel some sensitive information should be withheld until later in the process. This discrepancy in expectations can create tension and delay negotiations, leaving both parties frustrated. To avoid this, it is crucial for sellers to establish a clear understanding of what information will be provided and what should be protected before entering the due diligence process. Having a standardised due diligence list in place from the beginning can prevent misunderstandings.
Additionally, sellers should set realistic expectations with buyers about the type of documentation and information that will be shared and at what stage in the process.
Another frequent hurdle is when a buyer’s solicitor uses the due diligence deadline to delay formal commitment. While the buyer may be eager to proceed, their legal advisor might hold off on finalising the contract, leaving the seller in limbo. This tactic is often employed to retain negotiating leverage until the settlement day. Business owners can prevent such delays by working closely with their brokers to enforce mutually agreed-upon timelines from the outset.
Establishing firm deadlines within the contract and maintaining clear communication between the buyer, their solicitor, and the broker can help avoid unnecessary hold-ups and keep the process on track.
A third obstacle arises when sellers allow the buyer to control the due diligence list, leading to an unending cycle of requests that sometimes go beyond the original scope. When the buyer controls the list, they may continue adding items, overwhelming the seller with excessive demands and dragging out the process. To avoid this, sellers should take the lead by establishing a basic due diligence checklist at the beginning of the process. While it’s important for buyers to have input, setting clear parameters early on ensures a more structured and manageable process, preventing scope creep. By establishing an initial framework, sellers can minimise unnecessary complications while still allowing the buyer to conduct their due diligence effectively.
Despite best efforts, unexpected issues can still arise during due diligence. For instance, we recently had a case where a buyer expressed concerns over discrepancies in financial projections after consulting with their accountant. Initially, the issue appeared significant, but further investigation revealed the accountant had misunderstood the data, leading to an exaggerated concern. In such situations, clear communication is key. When a buyer raises an issue, it’s important to ask, “What does this mean for you?” If the buyer struggles to articulate why the issue is a problem, it often indicates the concern has been misunderstood or blown out of proportion. However, if they can clearly explain how it impacts their decision, the issue is likely genuine and should be addressed.
By prioritising real concerns and resolving legitimate issues efficiently, the sale can move forward without unnecessary roadblocks. Although due diligence is often seen as a hurdle, with the right preparation and approach, it can become a smoother, more efficient process. Business owners can avoid many common pitfalls by setting clear expectations, adhering to agreed-upon timelines, and taking charge of the due diligence checklist from the start.
Ultimately, the role of the broker is to navigate these challenges, and while issues will inevitably arise, keeping communication clear and addressing problems as they come can make all the difference in ensuring a successful sale.
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