[This is a guest article written by Virginia M. Turezyn.  She is a managing partner at Sival Advisors LLC, a boutique M&A advisory firm for technology and service businesses in the middle market.]

If you think it’s been a challenge to build your company, grow your customer base, hire and retain the right talent and eke out a profit over the years…now you are about to be put through a daunting set of hurdles to prove it to a skeptical buyer. Every stone will be unturned and achieving your forecast during the process may be one of the toughest tests of all.

I cannot emphasize enough that it’s your job to keep the company on track and to leverage your principal Advisory team to execute the sale process on your behalf. Let them play the role of adversary with the lead buyer candidate and keep you abreast of progress and control your time in front of the buyer for critical discussions.

Buyers have a fiduciary responsibility to their Limited Partners to thoroughly evaluate all aspects of your business. Key areas of focus will include:

• Financial Statements
  • 3-5 year historical financial statements
  • Audits or reviews
  • Projections for current year and 1-2 years in the future
    • Analysis of key asset and liability accounts
    • Normalized working capital
    • A/R aging
  • Inventory
  • Fixed Assets
  • Loans and obligations
  • Taxes – due and payable, including state sales taxes
  • CAPEX spending
  • Revenue recognition policy
  • Quality of Earnings report
  • Adjustments to EBITDA (one-time items and owner-related)
  • Unrecorded liabilities (to be uncovered)
• Customer and Sales Analyses
  • Customer concentration
  • Retention and history by account
  • Customer backlog and pipeline
  • Sales team compensation and incentives
  • Seasonality of the business
  • Product and services pricing
  • Discussions with key customers (to be done last)
• Business records and major legal documents
  • Material contracts review
  • Guaranties, loans, credit agreements
  • Customer and supplier contracts
  • Legal structure
  • RE and equipment leases
  • Any important restrictions imposed by 3rd parties
  • Indemnification
  • Employment agreements
  • Exclusivity arrangements
• Litigation history and potential litigation
• Condition of facilities and equipment
  • Future expansion plans and CAPEX requirements
• Management, Employee and Independent Contractors
  • Contracts and proper classifications/withholdings
  • Organization chart and bios/resumes
  • Compensation
  • Discussions with various individuals
• Technology / IP
  • Patents
  • Open source code, if any
  • Product and services licenses
  • Code escrow
  • Liens
• Environmental Review

In a due diligence process there will be discrepancies or items requiring further investigation. The cleaner the review the smoother the overall process and likelihood of closure and initial offer maintained.

Generally senior management team members are actively engaged in the due diligence preparation and discussions. Customer reference checks are generally held off until the end of the process to ensure minimal leakage of a transaction and concern among customers as to resolution.

Concurrent with the due diligences process will be the preparation of a Purchase and Sale Agreement and Exhibits. Buyers Representations and Warranties will be a part of this Agreement. A closing timeline will be coordinated and there will be some post-closing adjustments generally to true-up the working capital to be retained in the business.

Upon closing, key customers and employees should hear it first from management and a general press release is generally issued to broadcast the news and create positive energy around the transaction.

If the business is run smoothly during the process, the next phase of ownership can take on a well run business and maintain positive momentum for the company employees and its valued customers. For more information, check out part one of the series on being prepared to exit your business and part two on completing the right buyer for your business.

Virginia M. Turezyn is a Managing Partner at Sival Advisors LLC, a boutique M&A advisory firm for technology and service businesses in the middle market. Virginia has a broad and diverse background in strategy and business development, corporate M&A, private equity, venture capital and finance.