Due Diligence

Comments About This Glossary Term

Time kills deals! This is true in all kinds of transactions, and definitely with business sales. Due diligence is vital but it needs to be "diligent." By that I mean it should be pursued persistently and expeditiously with persevering attention. It's a very rare situation when due diligence should extend beyond 10 calendar days, at the most. The astute business buyer will retain a competent, professional (like a CPA experienced in such matters) to quickly review all financial matters, and a business attorney to check for any legal risks; and, the responsible seller will have everything ready for the buyer.

Due diligence is NOT the time for the buyer to "learn the business" or "get training;" That all comes later, during or following escrow. Due diligence is to verify that the representations made by the seller are true and that there are no undisclosed problems.

Due diligence is whatever it takes to feel right about the information that has been provided. I always tell my clients to shot for the moon but expect the stars, small businesses are not perfect and they don't always come with all the paperwork you want.

Due diligence could be examining the paperwork but could also involve observing the business discretely. Its a buyers opportunity to look at everything they need to look at to feel comfortable with moving forward in the deal. There is a beginning to due diligence and an end. When the due diligence period is over a buyer will be expected to make their decision if they want to buy the business.

If your buying a business and you need help with what documents to look at you can ask your CPA for some suggestions and perhaps your broker can give you ideas as well. In the end no one can or should make the decision to buy the business but the buyer.

Due diligence is a process by which the prospective buyer of a business takes a close look at the company by reviewing more detailed information than was provided when the buyer was introduced to the business. It ordinarily is conducted after the buyer and seller have an agreement regarding price and purchase terms, but before the sale is final. The due diligence period should be limited - a week or tw0 - so the seller knows if a deal will go through, and does not have to put off working with other prospective buyers for a long time. Due diligence for large companies can require several weeks or months.

Due diligence gives the buyer a chance to make sure statements made by the seller and/or seller representative about the business are accurate. The process also should enable the buyer to learn if there are any problems with the business not initially disclosed. Nearly all buy/sell contracts include the understanding that whether or not the transaction will be finalized is contingent on the buyer being satisfied after the due diligence examination. Once concluding this examination, the buyer has the option of proceeding with the transaction or, if not satisfied with the business analysis, cancelling the contract.

Some key due diligence functions include:

1. Reviewing financial information--often with help of an accounting or due diligence professional--including profit and loss statements and balance sheets posted for the previous three or more years. The purpose is to learn if there is a discrepancy between reported gross revenues and adjusted owner earnings and the representations made about these figures. Other documents, such as government filings, are examined to verify figures stated in the books.

2. Examining other proprietary information such as employee records, written agreements with landlords, vendors employees and/or customers.

3. Reviewing a complete list of assets to be included in the deal, if not provided before, and checking out key pieces of equipment to make sure they work properly.

4. Speaking with employees, if permitted by the seller, to evaluate whether they seem satisfied with their work and learn if they have any complaints about the business or the way it is operated.

Other due diligence tasks, if not already done, include checking with local the Better Business Bureau and Yelp online, to learn of any complaints about the company from customers, neighbors or other businesses.