Due Diligence

After you accept an offer or letter of intent (LOI) on your business, the buyer will begin due diligence. Due diligence is the process of gathering and analyzing information to help the parties determine whether to proceed with a business transaction.

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

Cancellation: If the transaction is canceled because of the buyer’s fault before a definitive agreement is signed, the buyer will forfeit both the initial and any additional deposits. Otherwise, these deposits will be applied to the final purchase price.

Conclude Due Diligence: Sometime during the due diligence period or upon its expiration, the buyer may decide that they are satisfied with the investigation and that they will continue with the transaction. When this happens, the buyer and the seller will sign an agreement that due diligence has been successfully completed. This signifies the conclusion of due diligence and the parties’ decision to end the investigation and proceed to a definitive agreement.

Closing Checklist: Once an offer is accepted and due diligence begins, we prepare a Closing Checklist and send it to the parties so we can begin preparing for the closing. The Closing Checklist contains detailed instructions for dozens of events that must be successfully orchestrated to ensure a smooth closing. Some items require waiting periods, such as forming an entity, and must be done regardless of which business you purchase. Thus, starting early in the process will ensure you close on time if you wish to do so.

Here’s what to share BEFORE an offer or LOI is accepted:

  • Confidential information memorandum (CIM)
  • Profit and loss statements (P&Ls)
  • Balance sheets
  • Summary or abstract of the lease, but not the entire document
  • Equipment list
  • Sales literature and brochures

Typical document requests and items that buyers inspect during due diligence include:

  • Federal income tax returns
  • Bank statements
  • Invoices and receipts
  • A full copy of the lease
  • Leases, such as premises and equipment leases
  • Third-party contracts, such as supplier or vendor contracts
  • Sales and use tax reports
  • Staffing and payroll-related documents, including job descriptions and employment contracts
  • Insurance-related documents like workers’ compensation as well as health and liability insurance
  • Equipment inspection reports
  • Licenses and permits
  • Marketing, advertising, and promotional documents
  • Environmental documents and inspections
  • Franchise-related documents

Here are some tips for ensuring due diligence is successful:

  • Preventing Problems: Anticipate buyer requests and organize documents for due diligence in advance. If you have the time, you should also engage professionals to perform pre-sale due diligence well before you begin the process.
  • Keep Some Wiggle Room: Be prepared to make further concessions in the event a buyer finds problems during due diligence. Just in case, be prepared by retaining some mental and emotional bandwidth for further negotiations. There is a high probability that a buyer will discover a few problems if you have not adequately prepared for due diligence. If problems are discovered, you should expect to provide a price concession. In other words, leave a little wiggle room in your negotiations in case problems pop up later in the deal.
  • Be Emotionally Prepared: Due diligence can be a grueling period for the seller. You must be prepared to commit a substantial amount of time and energy to the process. Some buyers’ objective is to wear you down, discover problems, and then attempt to renegotiate the terms of the deal. Be prepared for this possibility by preparing for due diligence so problems are uncovered and resolved before a buyer discovers them. You should also attempt to remain emotionally unattached to the process so you can negotiate from a detached, objective perspective.
  • Be Prepared to Extend the Time Period: Deadlines are not set in stone. Be prepared to extend time periods if problems arise. 

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