Loading Contents...

What Due Diligence Means to Buyers and Sellers

Prepared Sellers Ease Due Diligence and Engender Trust

Image of a business person typing on a laptop displaying a graph and a clipboard with a pen and form

What is Due Diligence?
Due diligence is the process of deeper investigation after the buyer makes an offer and that offer is accepted by the seller. Typically, the buyer makes an offer with a purchase agreement that states the buyer has ten days to complete due diligence. Keep in mind, the buyer has already reviewed enough information to commit to an offer and put down a deposit with a Michigan escrow company.

 

 

 

What Does a Savvy Buyer Need to Know About Due Diligence?

  1. Make an Organized Request within the purchase agreement for additional information you want to see.   Include income statements and possibly tax returns, customer contracts, supplier agreements, franchise agreements, employee contracts, ownership documents and any other material information.
  2. Treat Contingencies Separately as they often fall outside the due diligence period, such as required licensing or employee agreements.
  3. Review the Information in a Timely Manner so you can comply with the purchase agreement timeline. You may have a professional advisor such as a CPA review the documents, so you want to line them up in advance. Unfortunately you cannot ask or rely on any business broker to complete your due diligence for you.
  4. Once you receive the documents requested, you will need to make a decision within the time period set up in the Purchase Agreement.
  5. Request Any Additional Information ASAP. If you decide you need more documentation to support the income the seller is claiming, do this as soon as possible since you have time constraints to obtain these documents. It is okay to ask the seller to explain certain expenses or changes to the sellers net income.
  6. Make a Decision. Once you fully understand the income and expenses of the business, decide whether or not to proceed.
  7. Release Your Due Diligence stating that you are satisfied and are moving forward with the purchase.

 

How Can Sellers Help Themselves Regarding Due Diligence?

  1. Assemble a Thorough, Organized Package for your business broker upon listing the business for sale. The foundation of this package is three years of income statements, balance sheets and tax returns. Consult with your business broker on additional items that should be included.
  2. Provide a Written Explanation of Add Backs to your business broker, possibly with the assistance of your accountant. Unless the buyer understands how you arrived at your income figures, he or she will keep asking questions. 
  3. Keep Your Record Keeping Up to Date. Many deals have been lost due to the seller not letting the buyer know about recent changes to the gross or net income.
  4. Have a Partnering Mindset. The more information and organized record keeping you supply to your broker up front, the less information the buyer will have to keep asking for. This will not only save time - it will show the Buyer you are forthright, organized, and easy to work with when it comes time to transition ownership and train the buyer.