How a buyer looks at your business during due diligence

What is due diligence?

The buyer of your business has a duty to investigate. During due diligence, the buyer checks the information you previously shared in the sales memorandum and during your negotiations. Due diligence is usually carried out after you have signed a declaration of intent.

The buyer may request financial, legal, personnel-related, or commercial documents. These might include financial statements, financing arrangements, employment contracts, insurance policies, management reports, or leases for business premises. If the information differs from what you provided, further negotiations regarding the price or the terms of the sale may be necessary.

During the due diligence process, the buyer is looking for answers to key questions such as:

• Is the information I received accurate?
• What risks or dependencies are involved in this business?
• Is the price we have agreed fair?

How a buyer views your business

A buyer looks at (growth) opportunities, certainty, and risks. Many business owners see the due diligence process as the buyer’s responsibility, but you can prepare for this yourself. What might the buyer discover that you have not yet fully considered? Below are some common questions a buyer might have during the due diligence process.

Clear and reliable figures

The buyer wants to understand how your business is performing financially. Unclear or difficult-to-explain figures create doubt. And doubt can lead to a lower price or further questions. For example:

• Are the financial statements complete?
• Are there significant differences between years?
• Are there one-off high revenues or costs?

The more stable the turnover, the more attractive your business

Not all turnover is equally secure. So the buyer looks at the quality of your income. The more stable the turnover, the more attractive your business. Consider questions such as:

• Does the turnover come from many different customers or just a few large ones?
• Are there long-term contracts (which provide revenue certainty) or are many contracts due to expire soon (uncertainty)?

When transferring a BV, existing contracts usually continue to run, unless the contract contains a ‘change of control’ clause stating that the customer may terminate the contract in the event of a takeover.
When transferring a sole proprietorship (eenmanszaak), contracts do not automatically transfer; the other party must first agree.

Your own role and other dependencies within the business

Many businesses rely heavily on the entrepreneur personally or on a few key employees or suppliers. The greater the dependency, the greater the risk for the buyer. Questions include, for example:

• How dependent is the business on you as the owner?
• Are there certain employees who are indispensable?
• Is there a dependency on a single supplier?

Potential risks and consequences

During the due diligence process, the buyer may uncover risks or dependencies that delay the process and may lead the buyer to impose additional conditions, adjust the price, or perhaps even withdraw from the deal. For example:

• If 60% of your turnover comes from 2 clients; this is too great a dependency. Imagine if 1 of those 2 clients leave. The buyer may then stipulate as a condition that both clients renew their contracts before the sale.
• If important work processes or agreements are in your head, but not clearly set out in writing. The buyer will need more time to understand the business.
• If the business largely relies on you as the entrepreneur or on certain employees who will no longer be employed by the company after the transfer. The buyer sees greater risk to the continuity and progress of the business, leading to a lower valuation and a request to reduce the sale price.

Strengths of your business

A due diligence review is not just about risks. The buyer also looks at your business’s strengths. This means due diligence is not just an audit, but can also be an opportunity for renegotiation. These points support your negotiating position:

• If there are regular customers and recurring revenue.
• If there are growth opportunities and the business is scalable.
• If the processes are efficiently organised and well set out.

Carry out your own investigation beforehand

Some business owners choose to have an investigation carried out themselves beforehand. This is known as vendor due diligence. The advantage of this is that you identify risks earlier, resolve issues before the buyer spots them, and have greater control over the process.

Transfer

The due diligence review is an important part of the negotiation phase in a business sale. Do you agree on the findings? If so, you can finalise the sale and arrange the transfer.