Introduction

“Knowledge is a process of piling up facts; wisdom lies in their simplification.” – Martin H. Fisher, American Physician and Author

After you accept a letter of intent (LOI) for your business, the buyer will begin confirmatory due diligence, as opposed to preliminary due diligence, which occurs before the LOI is signed. Due diligence is the process of gathering and analyzing information to help the buyer determine whether to proceed with the transaction. 

Due diligence normally lasts 30 to 60 days but can be extended if both parties agree. In most circumstances, the buyer can walk away from the transaction if they’re unsatisfied for any reason during the due diligence period.

So, what’s a seller to do? Start by conjuring up your best Boy Scout. Start by being prepared. Doing proper due diligence on your own business before going to market will uncover any problems and give you a chance to resolve them before a buyer discovers them. 

The Purpose of Due Diligence

Businesses are complicated – there are hundreds of factors buyers must take into consideration when deciding if they would like to move forward with the transaction. Due diligence is the process of verifying facts about your business’s financials, operations, and myriad other details.

When evaluating a home for sale, buyers can quickly form an opinion on its value and suitability, even before hiring someone to conduct an inspection of the property. Homes and other tangible purchases often require little to no due diligence. However, buying a business involves assessing many intangible factors that aren’t readily apparent and are more difficult to evaluate. 

As a result of this increased complexity, buyers of businesses go through a lengthy and thorough due diligence process before completing the transaction. 

When Due Diligence Is Conducted

Due diligence begins the moment you accept a letter of intent. Only after that point are your representations verified during due diligence. This is important because if all buyers conducted their due diligence before you accepted an offer, you’d spend a tremendous amount of time with many buyers and risk a leak in confidentiality. Conducting due diligence with multiple parties simultaneously may also lead you to lose focus on your business, causing its value to decline. That potential loss of value is why the buyer must accept your initial representations at face value before they make an offer – only after you accept their offer can the buyer have the opportunity to verify your representations.