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.