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Selling a Business – Avoiding an own goal in due diligence – Part 5

By Peter Kroeger

How secure are your forecast revenues and profits?

In the last blog I dealt with the question of Forecast Gross Margins.

Another hard lot of questions you will have to answer will be to do with your historical and forecast sales and profits.

The hardest part of any sale is convincing an acquirer that the business is going to meet its forecasts.  All acquirers will argue that the best guide to future performance is the current and past performance.  If:

  1. you develop budgets and forecasts and
  2. report actuals against these forecasts on a monthly or quarterly basis, and
  3. your actuals are generally as good or better than your forecast,

then you have started to provide a measure of comfort.

You will need to look at each line item in your forecasts and if they show a steady progression and that is what you have always done, then there should not be a problem.

However, if you are forecasting a rapid increase in sales and profits at a level far higher than you have achieved before now, you must be prepared for some hard questions.

This is because you will sell your business to a person or group of people – let’s call them sponsors – who buy into your vision, perhaps even see that 2 + 2 could equal 6 or 10 or 20.

However, once a deal is agreed, which is always subject to due diligence, the sponsors hand the acquisition over to lawyers and accountants to verify that what you said was true.

Cynics might say that the purpose of due diligence is to reduce the purchase price.  I don’t agree that is always the case, rather, that the purpose is to ensure that the information supplied to the acquirer is true and accurate and the assumptions you have used are reasonable and stand up to rigorous scrutiny.

The lesson is, long before you start a sale process, do consider what you are going to say regarding your forecasts and start to collate the information that you think will be necessary.

I will deal with more such sticky issues in future blogs.

Please feel free to get in touch with Peter Kroeger to discuss your business sale.

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