6 essential things you should know or do before selling your business

Data Room & Due Diligence

Selling your business is one of the most significant decisions you’ll make. While that shouldn’t be a deterrent, the time, preparation and determination needed on both sides of a potential transaction are significant.

22.August 2023
Written by Mari Nygaard

Even though every deal is different, there are standard processes and requirements across the board, meaning preparation can ease a process that will likely take months or years to complete. 

Here we tap into the knowledge and experience of working alongside business owners across Europe who have decided the time is right to sell. We look at the questions you can ask yourself and your team, the issues that typically crop up during the process, pitfalls to avoid and tips for best practice.

Start with the obvious question

Why are you selling? And why now? Answering this is critical for you and your team, but it will also likely be the first question a buyer asks you. For them, understanding your motivation to sell and the situation or context that frames it impacts your company’s worth to them - in financial and non-financial terms. 

Retirement is a common reason, but it could also be wanting more family or leisure time away from the stresses and strains of being a business owner or even boredom and feeling it’s time for a new challenge. Whatever your reasoning, spend some time deciding how to frame it as positively as possible for prospective buyers. 

Timing is everything too. Depending on the economic and geopolitical climate at the time of the sale, a buyer’s attitude to risk will vary. However, businesses can and do sell well during periods of economic difficulty. As seasoned merger and acquisitions (M&A) professional Sindre Talleras Holen points out, good companies continue to trade well even when markets are cautious, so building a strong equity story for your company is critical. 

While savvy acquirers know there are always opportunities to be found, understanding the market context for a buyer and their likely attitude to an investment based on the economic conditions will help you prepare a stronger proposition. 

While acquirers may anticipate lower purchase prices during an economic downturn, they will also likely benefit as shareholder returns increase during an economic recovery. Understandably, it is all part of the buying and selling game, and extensive negotiations should be expected on both sides. Drawing on the expertise and experience of external advisors can deliver insight into patterns, trends and outcomes of sales during similar conditions - this expertise might come from your accountants and business advisors or from your broker if you choose to sell through one. 

What is a business broker?

A broker works on behalf of a client to sell or acquire a business. Just as a real estate agent receives a percentage commission for the sale of a house, a business broker also receives a fee, typically between 5 and 10% of the sale price

Two colleagues happily discussing a project

Assess your exit readiness

Now may feel like the right time to sell, but does your business's health match your ambitions and goals? Challenge yourself and your team to review it from a buyer’s perspective. Here are a few questions to think about:

  • How does your business health come across to an outsider? Are there problems or challenges that must be overcome to portray your business in its best possible light?

  • Are your goals for the sale, both financial and otherwise, specific, realistic and documented?

  • What are your red flags when it comes to buyer discussions? What factors or issues would make you walk away from the negotiating table?

  • How do you want to manage the sale process - via a broker or through your own channels and contacts? How confidential do you need the process to be, or are you happy to go public with your intention to sell?

  • Do you have the right team of external advisors to support you? Legal and accounting advisors are essential and expert members of your deal team.

  • Are you prepared for the long haul? A deal may take months or years to complete, and splitting your time and focus between a potential deal and business as usual is challenging. 

Read more:  How to know when it's time to sell your company

Use external advisors for insight and guidance

Although a transaction may seem straightforward, you should always use external expertise from those specialising in the M&A process. At a minimum, you’ll need legal counsel and guidance from your accountancy firm. Lawyers will be instrumental in guiding the entire sale process, from drafting and negotiating confidentiality agreements to negotiating the terms of the sale and ensuring all statutory obligations and laws are adhered to. 

Your accountant will be responsible for preparing financial statements the buyer requires to evaluate your business. They’ll also provide valuation and structuring advice, help negotiate the purchase price, and assist with post-closing issues. Many sellers also benefit from specialist tax advice, especially if the sale results in retirement or the investment of funds resulting from a successful deal. 

Besides the functional expertise offered by external advisors, due to their experience working on previous deals, they can also bring additional potential buyers into the game, which may speed up the process of finding the right deal at the right time. 

Get ahead by uploading the Q&A list in advance

Your advisors will set up a virtual data room, ensuring that business information remains secure and controlled throughout the deal process. One of the most critical and often time-consuming stages of the due diligence process is the Q&A stage, where buyers pose questions to the seller for a response. Once again, external advisors can play a critical role in speeding up the process as they will have experience with companies making acquisitions based on pre-defined matters and information. Requesting your advisor to prepare 100 questions that a buyer will typically raise and uploading these to the data room as early as possible can save substantial amounts of time down the line. Familiarising yourself with these questions will also help you and your team prepare for the intensive negotiation stage and feel more in control of the process.

A female staff working on her laptop

Create a clear and secure information structure

In any acquisition, buyers understandably spend a lot of time studying the company or business they are interested in. The quality of the information they have access to can make or break a deal - missing data, vague or confused information and how it is presented, stored and indexed in the data room all have a profound impact.

Virtual data rooms help get paperwork organised, but managing how data room users find and access documentation is key. A clear and intuitive indexing structure for folders and documents should be set up as early as possible in the process. Buyers expect a transparent and efficient process, and the ease of navigating what can be thousands of documents makes a tangible difference.

While ease of access is essential, so too is security. Data rooms enable user access control down to a granular level, allowing the data room owner to grant or restrict access to folders and documents based on user type and role. Adjusting permissions to suit your requirements brings peace of mind that highly sensitive information is protected at all times.

Given the high stakes involved in a deal and the potential for damaging data leaks, a data room's security features and protocols help ensure cybersecurity risk or simply human error is minimised. This is especially so compared to standard cloud storage software that may be used in other parts of your business.

Read more: The differences between cloud storage and a virtual data room for M&As 

It’s never too early to start

One of the most common questions we receive from our customers is when they should start preparing for a sale. The answer is always as early as possible. We see start-ups who open and populate their data room from day one of their business, knowing they plan to exit the company through a sale at some point. Even when this doesn’t apply, the sooner you start the document preparation phase, the better. Data rooms can also be instrumental as an ultra-secure storage tool; they don’t only have uses once you decide to sell. 

Managing board-level documents and records of strategic discussions, for example, within the controlled environment of a data room, offers peace of mind yet simplified and remote access regardless of location or device. 

Therefore, having a data room populated with key documentation such as financial statements, legal contracts, business plans, and employee information gives a deal process a significant headstart and ensures data security at all other times. 

Fundamentally, missing or confused information due to a lack of timely preparation creates a sense of disorganisation and lack of professionalism. Remember, you are the buyer’s guide in this process, taking them through your business, particularly during the due diligence phase. Once documents are uploaded, stay proactive and engage in discussion frequently and promptly while retaining your goals in mind. In other words, lead the process as much as possible whilst leaning on your advisors to do much of the heavy lifting. 

In summary

In addition to reducing the administrative burden of a sale, getting prepared early can add value to the deal. Fundamentally, however, getting to an agreed contract is the name of the game, and the process used by the seller is paramount in illustrating and delivering the outcome the buyer seeks. 

By following some simple but essential principles, calling on the expertise of experienced external advisors, and utilising effective processes and tools designed for deal-making, sellers can enhance their chances of closing a successful deal. In a well-prepared transaction, the enterprise value and its return on the buyer’s investment are typically higher, so the best advice is to start the pre-due diligence process right away, whether you are looking to sell now or in the future.

Download: Your guide to preparing for successful due diligence | MoF