Sellers: Don’t Wait for the Buyer to Begin the Due Diligence Process on Your Business

No experienced buyer purchases a company without learning everything there is to know about it. That process is known as due diligence.

During due diligence, a buyer and advisors will examine each aspect of the seller’s contracts, procedures, relationships, plans, agreements, systems, leases, manuals, and financial documents. This comprehensive analysis of a company is conducted before an acquisition, investment, or other business transaction.

The process requires an extraordinary amount of time and attention on both the buyer’s and the seller’s parts. That’s why we recommend that owners initiate the due diligence process as soon as they decide to sell and have an indication that the transaction will meet their financial security wishes and needs.

Starting the due diligence process well before the buyer requests documents allows sellers to remove any obstacle that might prevent a straight path to closing. Keeping that path free from unnecessary impediments compresses the time between the buyer’s offer and the closing. In a sales transaction, time rarely favors the seller so owners want to condense the process.

Buyers are skilled at finding the skeletons in your closet. They look for malfeasance or undisclosed material risks. They look for fraud or any misrepresentations you may have made such as improperly recognized revenues or expenses. They seek any information you have omitted such as unpaid taxes, pending, or threatened litigation, obsolescent business equipment, processes, products, or services.

The buyer is also looking for information that would affect the value of the company and the advisability of purchasing it. Up to the moment due diligence begins, you have controlled the information flowing to the buyer and you have the most leverage in the transaction. Once the seller signs a letter of intent, much of that leverage and control shifts to the buyer.

If the buyer’s search for information that would affect the company’s value yields no results, the hunt is on for anything that the buyer could use to improve the terms of the sale. And that search permeates the entire due diligence process.

Is it any wonder that sellers hate (and that is not too strong a word) this process?

And, is it any wonder that we strongly suggest that you and your advisors clean up every contract, agreement, stock book, record of corporate actions, manual, lease, or threatened lawsuit before you take your company to market?

Due diligence may also involve conducting interviews with key personnel and visiting the target company’s facilities to assess its operations. The purpose is to identify any potential risk or issues associated with the target company and to determine its true value. Therefore, the findings of the due diligence process can be used to negotiate terms of the transaction such as the purchase price, representations, warranties, and indemnification provisions.

Overall, due diligence is an essential step when transitioning your business. The process helps the acquiring company or investor make an informed decision and mitigate any potential risk associated with the transaction.

Expected Timeline – 60 – 90 Days

• Buyer sends initial request list
• Seller and their advisors collect documents and send to buyer
• Buyer analyzes documents, poses additional questions, and requests more information
• Seller and their advisors collect documents and send to buyer
• Rinse and repeat

In total you can expect to trade 200 – 300 pieces of information before a transaction occurs. Standing weekly update calls with the seller and their advisory team along with the seller’s advisors and the buyers is common from the start of due diligence until the end.

If you have any questions about the extent or value of the due diligence process, please contact your Relationship Manager. We’d be happy to help you get started.

For more information, please call your relationship manager.