Share This Info:  

What Info Is Needed From A Seller For Due Diligence? How Many Days For Due Diligence?

See All Discussions   •   See All Contributors   •   All New Discussions & Comments

Comments & Replies: 10     Views: 17694     Posted By: Timothy Cunha JD  Timothy Cunha JD: Business Broker, SF Bay Area

Topics: Buying A Business, Due Diligence     Tags: buying a business, due diligence, escrow bulk sales, selling a business

The list of documents that should be requested by a buyer of the seller to do an adequate job of financial due diligence can be 10 items or 500 items depending on the type of business and size of the business.

The short list of financial items, that I ask for, to start is as follows:

- 3 most recent years P & L- plus the current year to date.
- 3 most recent year Federal Tax Returns. (Forget the state)
- 4 most recent State Quarterly Payroll Tax Returns
- Lease and all options (First few pages of lease pay have everything you need except the options.)
- Weekly staff schedule including all owners and family members regardless or not of being paid.
- List of Equipment-Leased equipment clearly labeled.

This list does not include legal issues, regulatory issues, and competition analysis.

Due diligence process only takes a two days when performed by a trained CPA and all requested information has been received. The weeks of due diligence is needed not to review the financial records but to collect information from the seller to start and to get the added information that you will request after the initial inspection of the financial records. Also the time is needed to do market studies-a subject for another discussion!

You should always ask for 2 weeks to give you time to go back and ask the seller more questions. The key to protecting yourself is that whatever the time frame agreed, it does not start until the seller has delivered all requested documents to the buyers CPA. I am currently doing due diligence on a company, where the contract allows two weeks for due diligence that begins when the seller accepts the offer. The difficulty is that after 7 days, I as the buyer’s CPA had only received two pieces of information. It appears to me that the seller is trying to stall releasing the requested information until the two weeks is over. I now have two days left for due diligence. As of today I have received no added information.

I told the buyer to rewrite the agreement for due diligence to start upon delivery of the information, but the seller will not agree to that.

Contributor: Business Broker - Lliquor Stores, Markets, Hotels, N CA

Each business is different but here is a general list: business financials, tax returns, board of equalization reporting, government and state regulation testing, all valid licenses and permits, any violations, what do clients say about the business, city planning dept. regarding future plans for the area concerned, and police dept. regarding crime. Time is usually dependent on how good the records are and the size of the business that you are planning to purchase.

A comprehensive checklist of due diligence items isn't really possible b/c every industry has its own issues that you need to dive into in order to evaluate whether or not it's a good opportunity for you. If you are literally just starting the process, what I suggest is doing a comprehensive survey on what is available on the market today in that same industry and review as many advertisements for similar business opportunities and look at the key metrics or key points of information that are contained in the ads.

Eventually, an ebb and flow of information will emerge, and you should jot down key questions that are answered in these ads, and then bring your cheat sheet with you to your first buyer/seller meeting.

I try to push for due diligence periods of a week to two weeks maximum, unless it's a very complicated transaction that is international or has a ton of moving parts, etc...Buyers should know whether it's right for them after a week or two 95% of the time. If you need more time it means there's paralysis by analysis and it may be time to move on and cut everyone's losses.

Each business is unique and may require the request of different documentation to determine the true viability of the subject business. In general you are looking for the revenues coming in and all expenses going out.

Start with revenues. Business Bank statements, federal tax returns, state sales tax returns, POS reports and purchase invoices are all ways of cross referencing income. The purchase invoices should give you a correlation between the cost of goods sold (COG) and the income those COG produced through sales. Example is if the specific industry of business you are looking at has an average of 33% COG and they purchased $100,000 of product to resale during a give period, then you can assume the sales were approximately $300,000 for that period of time. Of course the COG of each business in any given industry will fluctuate but this will give you a reference point. Use at least a 6 month period as in a shorter period of time the fluctuation of stock on hand can skew the numbers more. If the numbers are way off of what the seller states the sales are it should put up your red flag.

For expenses some of the same items will help out. Bank statements, tax returns and purchase invoices. Also utility bills, payroll reports, etc.

The lease on the premise is also a very important document to review and understand.
Timing: If all requested materials are provided, a 1 week due diligence period is more than enough to request. If you need help to review the information be prepared by having your advisors ready to review with you. Be aware that no seller wants to be tied up in a long extended due diligence period whereby he is basically off the market to other potential buyers. If you have not completed your due diligence in the time period agreed to, you can always ask for an extension. Provided that you are moving forward and doing your part, most sellers will cooperate in an extension.

Contributor: Business Broker - Preschool Specialist

Your question makes the case for getting some professional help to represent you in the transaction. Most agents and brokers who represent buyers will have the documents already in their systems for making an offer. The standard forms for business purchases have a checklist of most of the due diligence items you would want, such as; tax returns, payroll reports, inventory, profit and loss, clearance of city permits and regulations, lease terms, etc.

You should allow as much time as the seller will let you have for inspections. However, if the business for sale has multiple offers, or at least a great deal of interest from potential buyers, you will want to accommodate the seller without taking too much time for your due diligence. There are also consultants out there, some of whom even happen to promote their services here on BizBen, who can help you with due diligence. You might want to look a few of them up for a consultation.

Contributor: Transactional Attorney

From a legal perspective the most important documents to ask for in due diligence are typically any existing contracts and copies of the corporate records, including articles of incorporation and by laws for a corporation and the articles of organization and operating or member agreement for an LLC.

There may also be a shareholders agreement or buy/sell agreement, and minutes of corporate meetings. If the business has employment agreements or an employee handbook, those are important to review as well. And while should not solely rely on the seller's disclosures, you should ask for documents around any past, pending or threatened legal action as well as any administrative action from any government agency.

Most businesses that have been around long enough will have something in their history, whether it's a past tax audit , a lawsuit, or a health code violation. While those may not necessarily kill a deal it's important to find out about them sooner rather than later so you can investigate further if necessary.

I advise my clients to arrange for a minimum of 30 days of due diligence on anything other than a very small, simple asset purchase. Doing due diligence correctly takes a substantial amount of time, and not everything will be within your control during the process. Give yourself enough time to allow for a little breathing room if something does take longer than expected.

The diligence items you need to look at may vary depending on the type of business you are purchasing. It is wise of you to consider this early in your search so that you can add certain items and issues to your list that come to light through the search process. If you are working with a qualified business brokerage that has experience in the specific industry you are looking at, it would be advisable to have your broker prepare a diligence list for you. If your broker is not experienced or able to help you to your satisfaction then you should find someone knowledgeable or in the industry to ask specifics of.

That said, diligence should include some level of information regarding,

- Lease or Property Agreements
- Inventory of Equipment, Machinery, Furnishings, Vehicles, Primary
Supplies and separately the inventory (if any).
- Income & Expense items, These could include taxes, P & L statements, Balance sheet, Actual payment receipts, Utility Billings, Bank statements, Register tapes, Ledgers, Service records. Service Records and anything specific or unique to the business.
- Disclosures regarding anything known that may influence the business income either positively or negatively.
- You should have all equipment, mechanicals and roof, AC, plumbing, electrical and vehicles looked at by professionals if there is any question as to the condition or value of these items.

When doing diligence, I like to look at as much as the seller is willing to give. It is worth mentioning that the seller may look at this as being overly intrusive. While you do need the information it is good to be respectful of the sellers time as well.

My experience with time of doing diligence is it will take 2 to 5 weeks, depending on the particulars of the business and availability of those helping you.

The functions of due diligence is “Verify, Verify, Verify!” The time frame of the due diligence should be spelled out in the purchase contract. The two main questions I would ask is: Has the buyer been approved by the landlord and is the buyer getting a loan, if so, has he been approved by the lender.

I would also make sure the seller can produce books and records of income and expenses to warrant the sales price of the business. Get a list of the furniture, fixtures and equipment and also an allocation of the sales price.

Contributor: Business Appraisals, Valuations Advisor

The first documents you will need are the financial statements but you may have to sign a confidentiality agreement before a seller will give you these documents. You should ask for at least the last two year end financial statements plus the most current statement (Balance Sheet and P & L). If you go forward on the purchase you need to look at the last two years of tax returns either before or when you start the due diligence.

I have sat through 23 years of due diligence's and it can take a few hours or a few days, usually no longer. It is a good idea to have an accountant go to the business with you and do the job for you. He will know exactly which documents will show if the financial statements are correct and if he finds some inconsistencies he will know how to search out the answers. Don’t forget to check the inventory, purchases ordered but not received and accounts receivables for collect ability. You can ask the seller to have these and other information prepared before hand to speed up the process. The larger and more complicated the business the more time will be needed to search additional areas.

Due diligence is usually finished in about 2 weeks. If you are going into a business for the first time, then buyer should ask for about 4 weeks. Buyer should ask the seller to provide tax returns and sales tax report for last 3 years. Purchase invoice for the past year should be helpful as well.

For cash related business, I also recommend doing physical observation for at least 2 weeks. I also recommend going to the city (and dept of ABC if they serve alcohol) to find out if the business license is current and the seller doesn't have any pending violations or operating conditions.

  Helpful Resources To Assist In Selling And Buying California Businesses
Willard Michlin, CPA, Certified Fraud Examiner, Due Diligence Services

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 805-428-2063.

Janet Carrera - Escrow & Bulk Sale Services - SF Bay Area

Redwood Escrow Services, Inc. is a full service, licensed independent escrow company. We are EAFC Fidelity bonded, fully insured & licensed with the Department of Corporations. Committed to offering our clients the most comprehensive variety of escrow services available. Phone Janet at 510-247-0741.

Shalonda Chappel-Pilgram: Escrow Services - Southern CA

Escrow services to brokers & agents, owner/sellers, & buyers. Established 43 years. Extraordinary service. Experienced with handling difficult transactions. One stop for all your escrow needs: Bulk sales, lien searches, UCC searches, liquor license transfers, publishing & recording services.

Helen Yoo: Escrow & Bulk Sale Services - Southern California

New Century Escrow, Inc. is a fully licensed & bonded independent escrow company. Over 20 years combined experience in handling bulk escrow transactions. Multi-lingual staff that speaks your language, including Korean, Chinese, Vietnamese. Call Helen Yoo direct at 626-890-1151.

Diane Boudreau-Tschetter: Escrow And Bulk Sale Services

California Business Escrow, Inc. is a full service independent escrow company serving all of California and has expertise in a wide range of escrows. Our team prides itself on providing an exceptional escrow experience. For more info phone Diane Boudreau-Tschetter at 888-383-3331 or 209-838-1100.

Brad Steinberg, Broker - Laundromat Specialists

PWS is the leading laundromat broker in California. Since 1968 PWS has brokered over 2,500 laundromat sales. With over 90 employees dedicated to the coin laundry industry, PWS has 18 licensed agents, a 3 person in-house finance department, 10 service technicians and a 20 person parts department.

Joe Sandbank, Esq. - Legal Services

I have provided legal counsel to business buyers, sellers and brokers for over 17 years. With prior experience as a business broker and SBA loan officer, Joe brings both a practical and legal approach to all aspects of the business acquisition process.

Elizabeth McGovern: Escrow Services - SF Bay Area

McGovern Escrow Services, Inc., is a leading independent escrow company. We are a trusted partner with our clients, assisting them through the tangled bulk sale & liquor license transfer process. We provide attentive, quality & innovative customer service. Phone Elizabeth McGovern at 415-735-3645.

  Related Articles, Events, Blog Posts, Discussions, Videos, Interviews
Before Buying A California Business, 10 Questions You Should Ask Yourself

Before buying a business, all serious business buyers should ask themselves some key questions about possible buying a small California business, franchise, or opportunity - from Peter Siegel, MBA (Business Purchase Financing Expert, ProBuy & ProSell Program Advisor with BizBen) at 925-785-3118.

Thinking Of Selling My Business: What Factors Create Value And Drive Price?

There are a lot of misconceptions about what enhances the value of a business. The following factors in this Discussion Post on BizBen are aspects of a business that really drives its value and pricing. Business owners thinking of selling should check these out these factors before selling.

Tips When Using Escrow Bulk Sale Services When Buying Or Selling A Business

The final part of the business for sale transaction is the escrow and bulk sale process by Peter Siegel, MBA (Business Purchase Financing Expert, ProBuy & ProSell Program Advisor) answers questions and describes the escrow and bulk sale process. Peter can be reached direct at 925-785-3118.

Find Out Why 80% Of California Business Buyers Never Find And Buy A Business

First the dreaded statistic: 80% of all California business buyers looking to buy a small to mid-sized business in California never end up doing so! Peter Siegel, MBA BizBen Founder And Director at 925-785-3118 covers successful tactics all business buyers of small businesses should utilize.

If You Plan To Offer Seller Financing: 3 Things Owner Sellers Need to Know

When selling your business, offering seller financing is a great way to help your business standout from others on the market and it is also a good strategy to consider that can help you close a sale. Peter Siegel, MBA (BizBen ProSel Program & Financing Expert) explains. Reach him at 925-785-3118.

Selling Your Business To One Of Your Employees - A Good Idea? Pros And Con

After investing years of time and talent into a company, many small business owners want to feel like they are leaving their business in good hands and for that reason, some sellers opt to sell their business to an employee. Peter Siegel, MBA talks about the pros and cons to taking this route.

Why Deals Fall Out: Unrealistic High Asking Prices Are Usually The Reason

The unfortunate truth is that approximately 50% of all small business sales transactions fall out. While failed transactions can happen for a many reasons, Peter Siegel, MBA (BizBen Director & Business Purchase Financing Expert) discusses the main reason deals fall through; steep asking prices.

Absentee Run Businesses - A Myth Or Reality When Buying A Small CA Business?

Some buyers search for an absentee business to own, wanting to collect profits generated by a successful enterprise without having to stand at the sales counter or cash register, without having to cook, operate equipment or talk to customers. Here's some insight about finding such a business.

See All News, Tips And Events

Chuck Post Laundromat Industry Expert
Tim Cunha Business Brokerage
Redwood Escrow Bulk Sale Services
Harry Sidhu SF Bay Area
Google Plus You Tube
Vlogs and Podcasts

Auto Related
Business Services
Children Related
Communication Related
Computer, Internet Related
Construction Related
Entertainment Related
Financial Services
Health, Beauty Related
Home Improvement Related
Maintenance Related
Manufacturing Related
Media, Publishing Related
Pet Related
Photography/Video Related
Real Estate Services
Restaurant, Food Related
Retail Related
Service Related
Sports Related
Transportation Related
Travel Related
Wholesale Related

Auto Body Shops
Auto Repair Shops
Bars, Sports Bars
Cafe Restaurants
Car Washes
Cleaning Services
Clothing, Apparel Stores
Coffee Shops
Convenience Stores
Deli Restaurants
Discount, Dollar Stores
Dry Cleaners
eCommerce Websites
Fast Food Restaurants
Florists, Flower Shops
Full Service Restaurants
Gas Stations
Gift Shops
Gyms, Fitness Facilities
Home Health Agencies
Ice Cream Shops
Juice, Smoothie Shops
Liquor Stores
Markets, Marts
Pizza Restaurants
Postal, Shipping Stores
Preschools, Day Care
Print Shops
Salons, Beauty Shops
Sandwich Shops
Smog Test Only Shops
Smoke Shops
Spas, Med Spas
Sushi Restaurants
Tire Shops
Towing Services
Vending Routes
Wireless, Cellular Shops
Yogurt Shops

Contra Costa
Del Norte
El Dorado
Los Angeles
San Benito
San Bernardino
San Diego
San Francisco
San Joaquin
San Luis Obis
San Mateo
Santa Barbara
Santa Clara
Santa Cruz

0 to $99,999
$100,000 to $249,999
$250,000 to $499,999
$500,000 to $999,999
$1 million to $2 million
over $2 million

BizBen - Where California Deals Get Done! 925-785-3118
7172 Regional Street #364 · Dublin, CA. 94568
BizBen · Copyright © 1994 - 2019, All Rights Reserved

               Vlogs and Podcasts  
Join Us On Social Media - Content Updated Daily
Sign Up Today - For Our FREE BizBen Weekly Email Newsletter
Includes The Best Info On Buying, Selling, Valuing, Financing California Businesses:
Articles, Blog Posts, Podcasts, Videos/Vlogs, Discussions, Q&A, Workshops, Webinars,
Resources. Watch For An Email Confirmation After Signing Up Above. Thank you.
Clost Login

Please confirm your registration by clicking the link we've sent to .

If you can't see it, please check your junk mail folder.

If you have any problems registering, or need assistance with your new BizBen User Account please phone BizBen Customer Support at 888-212-4747.

First Name:*
Last Name:*
Email Address:*
Confirm Email:*
Create Password:*
Confirm Password:*

You Are A:

Email Address:

500 New & Refreshed Detailed Postings Daily
Over 2500 Resources Available On BizBen
Since 1994. Where California Deals Get Done!
How Do I Navigate Through The Negotiation Process When Buying A Business...
Read More News
Thinking Of Selling My Business: What Factors Create Value And Drive Pri...
Read More News