What Does “Due Diligence” Mean During The Sale of a Business?

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Due Diligence: What does it mean to the Seller?

 

As a seller, it’s important to be prepared for the due diligence process that will take place once an offer has been made on your business. Due diligence is a crucial step in any business sale, and can often make or break a deal.

As the seller, you should expect the buyer to request access to all financial records, contracts, employee files, customer lists, and any other relevant information. The buyer will also likely want to tour the premises and meet with key employees.

To prepare for due diligence, start by gathering all of the requested documentation and making it easily accessible. You should also be prepared to answer any questions the buyer may have about the business. It’s also a good idea to provide a summary of the business, including key financial information and recent developments.

If you’re not sure what to expect from the due diligence process, consult with an experienced business broker or attorney. They can help you understand what buyers are looking for and how to best prepare for their questions.

Here are four tips for Sellers to consider:

 

Tip #1: When you give your Broker the company listing, try to include the last three years of your P&Ls, Balance Sheets, and tax returns. This will not only save a lot of time but will also demonstrate that you are forthright about your records.

The Buyer will want to double-check the income and expenses you have reported on your P&Ls to ensure that they are accurate.

Tip #2: Explain any “add-backs” to your agent so that the Buyer does not try to calculate how you came up with your numbers.

Unless the Buyer understands how you calculated your income numbers, he or she will ask for further documentation of income.

Tip #3: The less information the Buyer has to ask for, the better. Try to provide as much documentation (sales tax reports etc.) to your Broker as possible. Remember that depending on the season, the Buyer will want up-to-date financials.

Tip #4: Make an effort to keep your recording current. Many sales have been lost due to the seller failing to inform the buyer of any significant changes in gross or net income.

Due Diligence: What does it mean to the Buyer?

 

When making an offer on a firm, buyers frequently want due diligence, but they are unsure what it entails.

The Buyer should receive the seller’s income statements and, if necessary, their tax returns.

Contingencies that must be completed, such as licensing, employee agreements, or other such items are generally excluded from due diligence.

If you do not take the time to make a list of items that you’ll be evaluating, it’s more likely that the seller will just give you everything he has. You should try to assemble a checklist of things you’d like to look at so that you don’t constantly request more items. The Broker informed the Seller that he would have to supply a buyer with certain goods.

As a buyer, you are under a duty to either review the documents supplied by the seller or have your expert advisor do it for you. Unfortunately, you are unable to ask or rely upon your Broker to complete your Due diligence for you.

Once you’ve received the papers requested, you’ll have to make a decision within the time frame set out in the Purchase Agreement.

If you decide that you need more documentation to support the income that the Seller is claiming, try to do this as soon as possible since you have certain time constraints to obtain these documents. It is OK to ask the Seller to explain certain expenses or changes to the Seller’s net income.

Finally, double-check that you fully comprehend the company’s income and spending before moving ahead.

Once you’ve completed your Due Diligence, you’re indicating that the figures supplied to you by the Seller appear to be accurate and that you’re proceeding with the transaction.

DISCLAIMER: The information contained in this article is for general informational purposes only and should not be construed as legal advice. You should not act or refrain from acting based on any information contained herein without seeking the advice of an attorney.