7 – Conduct Due Diligence

You may begin conducting due diligence immediately after the seller accepts your letter of intent. Acquiring a business involves assessing many intangible variables that aren’t readily apparent and are difficult to evaluate. While due diligence is designed to limit your risk, you can never be absolutely assured the business is risk free. In most circumstances, you can walk away from the transaction if you’re unsatisfied for any reason during due diligence, and your earnest money deposit, if applicable, will be refunded.

Documents to Review

During due diligence, you will review many documents, including financial statements, bank statements, tax returns, lease information, and additional documents about the business. If the seller is financing the transaction, due diligence may be mutual and you will also provide them with a copy of your credit report, bank statement, and background check.

The Process

When buying a business, you must first make an offer before you can begin conducting due diligence. The seller’s representations are then verified only after the letter of intent is accepted. Before receiving an offer, most sellers are cautious about the information they’re willing to share with a party. If all buyers conducted their due diligence before making an offer, sellers would spend a tremendous amount of time with many buyers who may never make an offer in the end.

Length of Due Diligence

Due diligence can take any period of time, as long as both you and the seller agree to it. The following factors can impact the length of due diligence:

• Availability of Information: If the seller responds promptly to your document requests, the due diligence period can be shorter.
• Organized Information: If you are provided information that’s concise, organized, and clear, due diligence can be shorter still.
• Communication: Making yourself more available to the seller for queries and clarifications can also shorten the due diligence period.

The Role of ‘Representations’ and ‘Warranties’

“Representations” and “warranties” are statements and guarantees by the seller of a business relating to the assets, liabilities, and other elements of the business being sold. Representations and warranties (reps & warranties for short) are included in the purchase agreement that’s signed at the closing. They assure you that legal remedies are available if the seller fails to disclose any key facts regarding the business you don’t discover during due diligence. In the purchase agreement, the seller will make factual statements regarding the condition of the business, covering nearly all aspects of the company, assuring you their representations are true. If proven to be otherwise, you are entitled to seek legal remedies, which could result in the seller paying you for damages.

Conclusion of Due Diligence

Sometime during due diligence or upon its expiration, you may decide you’re satisfied with your investigation and are ready to proceed with the transaction. When this happens, you and the seller sign a document memorializing the “conclusion of due diligence,” documenting that the contingencies have been resolved, and your intent to move toward a closing.

Contingencies that Survive Due Diligence

There are often contingencies that survive due diligence, such as bank financing, franchisor approval, lease assignment, or license transfers. These contingencies are resolved between the conclusion of due diligence and the closing and will be noted in the document concluding due diligence.

Opening of Escrow and Additional Deposit

Upon signing off on the conclusion of due diligence, we will request that you place an additional deposit with the escrow company if you’re an individual or if you’re purchasing a small business. All deposits will be applied to the final purchase price.