Whether you're buying a business or planning to sell one, it helps to understand how a buyer thinks. What they look for shapes what a business is worth. Due diligence is how they check whether it's really there.

Most business owners start thinking about selling when a buyer gets in touch. By then it's often too late to get the best price.

What makes a business attractive to a buyer?

The short answer is a business that doesn't need its current owner.

Buyers look for something packaged, sellable and self sustaining. If the business depends on the owner's relationships, knowledge or daily effort, a buyer is taking on a risk. When the owner leaves, some of the value could leave too.

Why an owner dependent business is worth less

When we carry out financial due diligence for a buyer, one of the first things we do is replace the seller's pay with the cost of the people needed to replace them.

If the owner is currently the marketer, the HR director, the operations director and the chief bottle washer, each of those roles has to be filled. Each salary comes off the profit. Lower profit means a lower value.

This is often the biggest surprise for sellers. A business that looks very profitable on paper can look very different once the owner's unpaid roles are costed in.

Predictable revenue and a strong financial backbone

The other thing buyers look for is income they can rely on. We describe it as trackable, reliable and predictable revenue.

That has to be backed up with evidence. Healthy and up to date financial reports. Realistic forecasts. Strong budgets. Together, these give a buyer confidence that the future will look like the past.

Without them, a buyer is being asked to take the seller's word for it. Most won't.

What is due diligence?

Due diligence is the process of checking a business before you commit to buying it. It makes sure the checks and balances are in place.

It's more than reading the accounts. A good accountant can interpret a set of financial records and tell the story behind them. That story often reveals more than the headline figures.

Looking beyond the numbers

Due diligence asks questions such as these.

How is the business funded? A business funded by debt carries very different obligations from one funded by equity.

Are there any unusual years? If profit dipped or spiked, what happened? Was it a one off, or a sign of something that could happen again?

Does the history match the records? The aim is to understand the background of the business and see how it shows up in the numbers.

Checking the seller's story

Ultimately, due diligence makes sure that what the seller says is correct. Most sellers aren't trying to mislead anyone. Every owner sees their business in the best light, and the numbers need to support that view.

For a buyer, this is protection. For a seller, it's a test the business will need to pass.

If you're selling, see your business as a buyer would

If you're planning to sell, everything above is worth checking now, long before a buyer does it for you. Our post on [internal link: how to prepare your business for sale] explains where to start.

Helping You Get The Business You Want

Buying a business is a big commitment, and the numbers rarely tell the whole story on their own. Selling one means passing a test you can prepare for years in advance.

Whether you're buying or selling, get in touch. We'll help you understand what's really there, and what it's really worth.

Get in touch: carthyaccountants.co.uk/contact