In simple terms, due diligence is the process of the buyer finding out what the business is really worth and establishing whether the price is one worth paying. But what about the seller? I believe they need to do their own due diligence. The question they need to consider is…
What price do I need to sell my business for?
Look carefully at the wording. It’s not what can I sell it for, but what do I need to sell it for. This simple looking question can cause all sorts of problems. In order to answer this question you need to understand what you want your life to look like post business sale. What will you do on a day to day basis? What will you fill your time with? How much will your lifestyle cost?
These aren’t easy questions to answer, even harder is putting a figure on how much you need to sell your business for in order to fund it. I’ve known of some business owners where £1 million was enough, conversely I’ve known of others where £25 million wasn’t enough.
In a perfect world, the process of thinking about these questions should start well in advance of a business sale. This allows time to grow the business (if a bigger number is needed), tax efficiently withdraw capital over a number of years, etc. However, often the ‘glory’ of a big sale can become overpowering and overtake the personal due diligence that should be taking place.
What about those businesses where the exit isn’t going to be a sale? What if the plan is to pass the business down to children? It’s still important to know what you need to realise for your business; what do you need to release from the business to be financially secure for the rest of your life? However, this time the capital isn’t released through a business sale, it’s released through other means that keeps the business intact for your children.
If you are (or know) a business owner who would like some professional guidance on your personal due diligence, please get in contact. We’d be happy to discuss you and your business over coffee.