Due Diligence is renowned for being the most stressful part of the sale process for any business owner. However, by partnering with an advisor like Chapter International the process can be significantly easier, having a trusted partner who has navigated Diligence multiple times can ensure a smoother and less emotionally taxing process! We will discuss two core areas, the process itself and preparation.
The ultimate objective of any buyer in Due Diligence is two fold, firstly to verify the selling parties claims about their business (as their initial offer was based on such claims, such as the financial statement) and assess the risk and opportunities of the brand in a greater level of depth.
With this in mind, the process is generally split into three areas: Operational Diligence, Financial Diligence & Legal Diligence (some buyers combine Financial & Legal Diligence). Each buyer may have a slightly different specific process but broadly speaking these are the three areas. One thing they all have in common is their initial data request, which is perhaps the most time consuming element, whereby the buyer requests an array of different information - on average this can take sellers 3-5 days to complete.
Operational Diligence covers multiple areas, from re-assessing of the brand and product opportunity to analysis of vendors and contracts. Regarding the contracts, it is crucial to have a thorough understanding of all business critical relationships, such as fulfilment centres, employee and softwares. The buyer will likely wish to maintain these contracts and processes in the short term, so a thorough understanding of this is key. Regarding the branding and product, whilst the bulk of this analysis would have been conducted pre offer, a buyer will re-analyse their interest in the specific product suite and determine whether this could be a fit for their broader strategy. Furthermore, detailed analysis will be conducted on additional areas such as account health and product compliance.
Financial Diligence is what it states on the tin. It is the stage in the process where the buyer recreates the Financial Statement and most importantly the profit and loss for at least the previous 24 months. As the majority of valuations are determined by the net profit or Seller’s Discretionary Earnings’ for an Amazon FBA Business / DTC Brand, determining this is crucial. The data requested will be part of the initial request, but buyers must verify this data using third party sources (such as bank statements and accounting softwares (Xero, Quickbooks)). Legal Diligence is centred around ensuring all of a sellers registrations and legal documents are in order. In the UK, this would involve analysing articles of incorporation and business registrations. More broadly, this analysis ensures all IP and Assets are owned by the seller and will also assess any legal risk at an international level (for example, a brand owner may not own the Trademark of their brand in China).
The key for a smooth due diligence process is the Preparation Phase. When partnering with a professional advisor like Chapter International we ensure the business is perfectly prepared for the sale process. Having been involved in over 30 Ecommerce brand transactions, our team has a clear and easy workflow to obtain all of the relevant data ensuring limited disruption to the day to day operation of the businesss. Specifically, this involves obtaining all of the core request data in advance and ensure all financial statements can be easily verified, our team will directly source this data from relevant Accounting Softwares, Companies House or a Sellers In-house Database / Dropbox.
Due Diligence can be very time consuming, but it can be stress free and an enjoyable process. The key is understanding what to expect and to prepare accordingly. We at Chapter International aid buyers and sellers to either acquire or exit their Amazon FBA & DTC brands. If acquiring or selling a brand is something that you are considering in 2024, please contact us for a confidential conversation. Our team can provide guidance across the full process and assist you in deciding what type of business is right for you.