What common issues does due diligence uncover, and how do you fix them?
When preparing to sell, the due diligence phase can be a make-or-break moment. Buyers typically scrutinize every financial aspect of your business to ensure a sound investment. Being proactive about the issues they look for smooths the process, boosts your valuation and ultimately makes the sale easier. Eight issues come up most often — each with a fix.
1. Inconsistent or inaccurate financial records — fix: keep records accurate, consistent and current; work with a qualified accountant to organize balance sheets, profit-and-loss statements and cash flow statements so buyers trust your reporting
2. Unreported or underreported income and expenses — fix: be transparent, align financial reports with tax returns, and correct any aggressive accounting well before the sale
3. Overreliance on the founder or key employees — fix: delegate to a capable leadership team and document standard operating procedures so the business runs without you
4. Unresolved legal or tax issues — fix: settle lawsuits and disputes, clear tax liabilities, and update contracts with legal counsel ahead of the sale
5. Unhealthy cash flow — fix: improve liquidity by reducing accounts receivable, renegotiating supplier terms, cutting unnecessary costs and moving idle inventory
6. Lack of clear financial forecasting — fix: prepare realistic two-to-three-year projections of revenue, margins and cash flow, including growth initiatives
7. Inadequate documentation for key contracts — fix: organize and update customer, vendor and lease agreements, and extend any nearing expiry
8. Inaccurate valuation of assets — fix: obtain an independent valuation of tangible and intangible assets, including IP and proprietary technology
Key facts: common due diligence issues
Eight frequent findings: inaccurate records, misreported income, owner-dependence, legal/tax issues, weak cash flow, no forecasting, poor contract documentation, mis-valued assets
Fixes: clean financials, transparency, delegation and SOPs, resolved disputes, improved liquidity
Prepare realistic two-to-three-year projections and organize all key contracts
Start well before the planned exit to avoid deal-breakers and secure a higher price
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Disclaimer: This article is for general informational purposes only and does not constitute legal, tax or financial advice. Consult qualified advisors regarding your specific circumstances.
