The Due Diligence Checklist for £5-£10 Million Revenue Businesses Looking to Exit

1. Finances

Starting with your finances is a good indication of your readiness for sale - ensure your finances are in order and that you can provide the appropriate commentary and information to support your position. Deal with any outstanding issues or exceptional items before you are challenged, as potential buyers will scrutinise your financial documents. It’s also a great opportunity to evaluate your business performance and look for improvements in profitability as part of the exit plan. The key documents generally include:

• Income statements from the last three years, at least.
• Up-to-date balance sheet.
• Cash flow statements.
• Tax records from the last three years.
• Financial forecast for the future of the business, e.g. a five-year plan.

A buyer will be looking for accurate and detailed financial records, and a transparent process to build trust as you prepare your business for sale.

2. Legal Documents

When performing due diligence, it is important to ensure that all your business operations comply with current laws and regulations. Making sure key documents are accessible and complete such as:

• Key company documents that establish ownership of the business, commercial assets and strategic relationships.
• All significant contracts, with partners, suppliers, customers, and employees (including freelancers).
• Intellectual property is correctly patented, trademarked and copyrighted (and that you have the correct documentation highlighting your ownership).
• Being upfront and disclosing any ongoing or past legal issues that could impact the sale. It is better to be honest as your buyer may find out another way.

By having all your documents prepared, you can address any concern a buyer may have. This also enables you to analyse your own business, gives an imperative to conclude any unresolved contracts or issues and gives you confidence that when you exit, everything is ready for the next owner.

3. Operational Information

Ensuring your understanding of your operations matches with your processes and documentation is one of the fundamental elements on the exit checklist. This is an essential value component and an opportunity to fine-tune your operation for that transition. Depending on the business activity operational plans can vary a great deal. Key tasks include:

• Providing detailed business plans outlining all the strategic goals and objectives.
• Providing relevant information on key employees that are required to meet your business objectives. Include details about specific roles, contracts, and salaries.
• Creating a comprehensive list of major customers and suppliers, along with the services they are currently using, any potential services you believe could benefit them and your terms and conditions agreements.
• Documenting the processes and procedures that demonstrate the operation of the business.

Helping your potential buyers understand the day-to-day running of your business and the potential for the future could be just the thing to secure a sale. It can also help you find the right buyer. Depending on your exit strategy you may want them to align with your vision and they will want to see the business succeed just as much as you do.

4. Market Position and Competitive Analysis

A well-prepared exit checklist should include an analysis of the business’s market position. This may be a refresh of existing strategy or new areas you need to explore:

• Refresh or undertake market research. Knowing how big the market is, what is your company’s current position? Where is the growth potential? What trends can you use?
• Knowing your competitors and emerging competition is essential to building a strong valuation. Understanding what your competitors are doing that you aren’t could be extremely beneficial when considering options on growth pre-sale. Creating a comprehensive list of your key competitors and demonstrating your relative value proposition can help your business stand out and give a successor confidence about the future growth.
• Being forensic about the strengths and weaknesses of your business by carrying out a thorough SWOT (Strengths, Weaknesses, Opportunities, Threats) analysis can highlight the company’s strategic position and highlight where you need to channel your resources.

5. Communicating Your Plans

When exiting your business, you need to ensure that you communicate your plans clearly to those who need to know.

• Plan who you are going to tell and more importantly when it is necessary for them to know.
• Be transparent about your objectives and what you want from your exit and ensure your plans do not disrupt the day-to-day activities of your business.
• Depending on the type of exit - probably the hardest task is to make yourself redundant (although not in a literal sense). Handing over your responsibilities to your management team and slowly stepping back until you feel confident that you are ready to leave and the transaction is underway.
• Building a team early for the exit includes trusted internal key members of your team and your external advisors. Ensure you have clarity on the timescale and the pace you want to set.

Preparing for your exit is a unique experience, even if you have done it before, it’s a particular focus for this business. Firms with £5-10 million turnover are significant in scale and complexity. Using these 5 key areas of focus requires you to overview your business in every aspect to ensure all operations are optimised, your people are informed and your documentation is in order. Following through on a well-prepared due diligence checklist can significantly enhance the chances of a successful business exit. Well-presented and accurate financials, comprehensive disclosure of legal and compliance documents, current market knowledge, competitiveness and growth potential - all can contribute to an increase in the value of your business and a successful exit.