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The Due Diligence Period Explained

The Due Diligence Period Explained: Helpful Tips for Both Buyers and Sellers

Due Diligence is one of the most important parts of any business sale transaction. The buyer has decided that they wish to move forward with purchasing a business, and they submit an offer. The seller accepts it, but there are understandably many questions that the buyer has about the business. Once the contract has been executed, the buyer then has the opportunity to delve into the financials and company history, in order to get the full picture.

Digging Deeper

This can be a significant amount of work for the seller to provide all of the documentation and answers, so most of the time, sellers will hold off answering extremely detailed questions until the due diligence period, because that’s why it exists. Therefore, buyers shouldn’t expect to have all of their questions answered before an offer is made. To some extent, buyers need to take the information that the seller has provided at face value, and then dig deeper during due diligence.

All due diligence questions need to be asked by the buyer in a very timely manner. The seller then needs to provide the answers to the buyer for their review. Since this is a time-sensitive issue, it is best for buyers to have their list of questions prepared ahead of time. It is also suggested that sellers prepare as well. Gather all documentation, scan it into electronic copies so it can easily be shared with the buyer, and keep it in one place. That way, there won’t be any scrambling to find everything at the last-minute. For sellers, it can feel that the list of questions from a buyer is never-ending, but try to have patience, and help them by providing all requested documents and answers. After all, the buyer wants to buy and the seller wants to sell, so everyone working together towards that goal is essential to making a business sale happen.

A Very General Guideline

Since every business is different, it is impossible to provide a comprehensive list of documents that could possibly be requested as well as operational questions that could be asked. Below is a very general guideline of common due diligence items. Buyers are completely responsible for requesting any documentation that they deem necessary, and asking any and all pertinent questions during the due diligence period. Sellers are required to answer truthfully and provide all requested information where possible.

Due Diligence Commonly Requested Documents:

  • Tax Returns for last three years
  • End of Year Balance Sheets for last 3 years
  • Profit & Loss statements (including the current year to date)
  • Bank Statements for last three years, plus current year to date
  • Copies of invoices
  • Vehicle titles
  • Copies of all real estate leases, deeds, mortgages, title policies, surveys, zoning approvals, variances or use permits.
  • Payroll tax for last three years
  • Employee list/job function/rate of pay
  • Copy of insurance policies
  • Equipment/asset list
  • List of current liabilities

What About Cash-Based Businesses?

If the business is a cash business you will need purchase invoices, sales invoices and register tapes or point of sale print outs. Tax return numbers are generally considered to be more accurate. In many cases the business may actually be earning more than the tax return shows.

Due Diligence Commonly Asked Questions

  • Is the seller properly registered with the Department of State to do business? 
  • Is the local competitive landscape about to change? Is a new, stronger competitor moving next door? 
  • Are the traffic patterns about to change due to road construction or the opening of a by-pass? 
  • Does intellectual property convey with the sale? If so, get a list of patents, trademarks etc.
  • Does the business need licenses or permits to operate? Get a list of those and ask to see those documents. 
  • Are there any pending or threatened lawsuits? 
  • What is the general make up of the client list/customer base?
  • Does any one client or contract make up a significant amount of the annual revenue for the business? 
  • Have there been any substantial deposits for future projects from clients/customers? 
  • Have there been any significant customer complaints either online or directly? 
  • Has there been any advance payments made, including a large sale of gift certificates/cards? 
  • How will buyer and seller handle “work in progress” that is happening during the closing date?

Every Business Is Different, So Every Due Diligence Is Different

The bottom line with due diligence is that documents requested and questions asked will vary greatly from transaction to transaction, because every business is so different. Not every document or question from the above lists will be applicable to every transaction, and by no means is this meant to be a comprehensive guide.

Buyer Beware Applies

Remember, the ultimate responsibility during due diligence lies with the buyer to ask any all questions that they would like to have answered by the seller. It’s important for buyers to keep in mind that they need to be strategic with their questions, so that they are able to make informed decisions about the business they are purchasing.

If you are a buyer or seller, and would like to speak to a professional business broker about your options, please feel free to reach out to us!