Selling Tips: Financial Due Diligence Basics
Selling your business is a big deal, and financial due diligence is one of the most important steps. This is when buyers check your financial records to make sure your business is making money and can keep doing so after the sale. It might feel overwhelming, but with good prep and the right help, it doesn’t have to be. Here’s what you need to know:
3 Key Things to Know About Financial Due Diligence
What is Financial Due Diligence?
Financial due diligence is when buyers take a close look at your finances—like your income, expenses, and profits—to see if everything is accurate and reliable. For example, if your business is set up as an LLC, they might check how it would work under a different setup, like a corporation.
How to Get Your Finances Ready
Your financial records should be clear and professional. If you use cash-based accounting, switching to accrual-based accounting can help buyers see a fuller picture of your business. A sell-side quality of earnings (QoE) report is also a smart move. It shows key details about your finances and builds trust with buyers.
Why You Need Advisors
You don’t have to be a financial expert to get through due diligence, but having experienced advisors can make a big difference. They’ll help you prepare your financials, answer buyer questions, and show off the strengths of your business. They can also help with tricky stuff, like tax planning.
Key Terms to Understand
Quality of Earnings (QoE) Report: A detailed financial report that shows your revenue, profits, and overall stability. It helps buyers feel confident in your business.
Accrual-Based Accounting: A method of tracking income and expenses when they happen, not just when money changes hands. It gives a clearer view of your business.
Transferable Economics: The parts of your business—like revenue and profit—that can keep performing well after you sell.
Why This Matters
Financial due diligence is one of the first things buyers look at, so it’s your chance to make a great impression. With good preparation, you can build trust, speed up the sale process, and even negotiate a better deal.
