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Seller Asks: How Long Should I Wait For The Buyer To Do Their Due Diligence?

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Comments & Replies: 8     Views: 3393     Posted By: Peter Siegel MBA  

Topics: Due Diligence, Selling A Business     Tags: due diligence, selling a business

The last thing you need to deal with when selling your business is a buyer who is dragging their feet. The due diligence process by the buyer should only last 4-14 days.

There really isn't much reason for it to last much longer than that. If you are organized and ready to go with all important information and documents that a buyer is going to want then this is all the time any competent business buyer and their CPA for the should need to investigate the business for sale.

You do not want the business off the market for an extended period of time because you may miss out on a better offer. So be firm about the length of time for due diligence - get it in writing (purchase agreement) and make sure all parties to the transaction stay with the schedule.

A successful business for sale transaction takes both parties working together. If a buyer is dragging their feet or doesn’t seem as interested as he or she should be then it might be time to move on.

Replies To This Comment
The agreement usually stipulates how long a seller has to prepare the requested information and in turn how long the buyer has to review. If you kept your part of the bargain and provided the information requested in your allotted time period, it isn't unreasonable to require the buyer to adhere to his previously agreed upon guidelines. In my experience, unless the buyer can provide a better reason than I just haven't gotten around to it or I've been really busy, be leery of any application for an extension.

While I always suggest to sellers that they set a fairly tight due diligence period to keep the buyer moving, the reality is that if a buyer is acting good faith to conduct their due diligence, you are probably not going to terminate the agreement just because diligence has not been completed.

Where buyers and sellers get into trouble is by setting due diligence periods and then not documenting extensions. This can leave the buyer thinking that the seller has waived their termination rights and extended the deadline indefinitely.

If you do get to a point on either side where due diligence is taking longer than planned it's important to make sure that you check the contract and put any changes into writing.

If the buyer is simply not requesting documents or conducting any due diligence at all (or is otherwise not communicating), I agree with Peter that you want to quickly decide whether the buyer is legitimate and move on if they're not.

First, it's extremely important to have a very clear and specific due diligence clause in the purchase agreement, with an unambiguous date and time after which the buyer no longer has the option of canceling the contract. And, there should be a clear definition of the penalty, such as forfeiture of the deposit, if the buyer attempts to terminate the contract after the due diligence period has expired.

Then, as Mark has pointed out, any extension must be clearly defined, in writing, signed by both parties. The process I use is to have the buyer formally terminate the contract during due diligence, with a stipulation that if the seller will extend due diligence "until a certain date" or "for _ days", then the buyer will rescind the termination. In this way, there is no ambiguity.

How long should you wait? Only so long as is necessary for the buyer to make reasonable inquiry into the representations made by the seller. If the seller does agree to extensions, they should be short and certain. Otherwise, the business is off the market and other sales opportunities are lost.

Remember, "time kills deals." You, the seller, must do your part and have everything that you could reasonably anticipate would be required by the buyer prepared long in advance of getting an offer, so that there should be no reason for due diligence to take more than a week or two at most.

Contributor: Due Diligence, Valuations Advisor

It is reasonably to expect a buyer to complete due diligence in 14 days from the time the requested documents have been provided, not from the time the deal is struck. Often due diligence projects result in renegotiation of the price and terms of the sale. For example if the add backs are improper or a concentration issue turns out to be greater than disclosed, then a new price and terms discussion is appropriate. This takes time.

The need for documentation and drop dead dates is evident and good advice from a legal standpoint. More important is the chemistry between buyer and seller, and how each is reacting to the due diligence findings.

If the buyer is going to be dependent on the seller after the sale for training and support, and the seller gets a bad attitude in due diligence, then there will be problems down the road.

Great question Peter and in my opinion, the Due Diligence time period is so often blatantly disregarded and understood.

Due diligence is not a time to find out what is right or wrong with the business and whether a Buyer under contract really wants to buy the business. This is the time to determine if the facts and figures presented are accurate as portrayed.

Do your homework before going under contract and opening escrow, you will save yourself a tremendous amount of time and frustration.

10-14 days is enough time for the buyers to do their due diligence, especially on a restaurant. I have found that if the buyer is not really satisfied, it's over rather quick.

Many of my buyers will go about their initial due diligence in the way of visual observation, and so they will figure out the typical purchase amount, and then stand outside the business and "count heads" as they go in. Although a visual observation might not seem very scientific, it's actually quite accurate, and many can came at a gross figure for the day within a few hundred dollars, and so they can understand if the seller is being forthcoming on the financials.

It's easier for a seller to get rid of a buyer who is dragging their feet, because you do the due diligence before you open escrow, although they may not get a definite answer from a perspective landlord, it's possible to pre-qualify in a sense (credit, assets, experience, etc.) The seller should try to make the buyer completely satisfied, because it will make for a smooth escrow later on.

This will depend on the type of Business you are selling. A closed door pharmacy doing 7MM in revenue will require a different due diligence period than a restaurant doing 700K in revenue. Besides revenue, the industry and other factors will also come into play.

In my experience, a buyer usually asks for a much longer due diligence period than required and this is where the broker needs to set expectations and make sure that both parties adhere to strict due diligence timeline and if by any chance there has to be a change in the timeline, it should be addressed in writing.

Although I try and accumulate as much information as I can in the initial stages of listing, there is always additional information that is requested from the seller during due diligence. I have often noticed that the seller takes longer than promised in delivering the requested information. This can lead to the buyer performing in a similar manner along with doubting the seller and their intension once the information is finally received.

Frankly, one of the conditions that a seller should consider in addition to the offer price is the buyer's commitment to expeditious and efficient due diligence ... having his professional advisers ready to act and his questions ready to pose. Because, no matter how much the buyer is offering for the business, if he is not going to be serious about due diligence, time WILL kill the deal, and the seller will end up with nothing.

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Diane Boudreau-Tschetter: Escrow And Bulk Sale Services

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Willard Michlin, CPA #106752, offers buyers step by step training & assistance in doing Due Diligence Services when they are thinking of making an offer, or are in process of investigating a business purchase. He helps to determine the actual net profit even when there is cash. Call 800-864-0420.

Helen Yoo: Escrow & Bulk Sale Services - Southern California

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