In the sale of a business, due diligence is the investigation that confirms the price and terms are appropriate and that no material issues surface after closing. It typically begins once a letter of intent is signed and the parties enter a period of exclusivity.
Buyers and sellers both have work to do in this phase. An experienced M&A advisor can carry much of the coordination and keep the process on schedule.
Due diligence for buyers
For a buyer, diligence answers the central question of whether the price is justified. Its findings indicate how much profit the business can produce under new ownership, and how quickly.
The review spans legal, financial, organizational and operational matters. In larger transactions it often includes a quality of earnings review, an independent examination of whether reported earnings are accurate and sustainable. Common questions include:
- How is the business organized? The acquisition of a sole proprietorship differs from that of a partnership, corporation or LLC, and the choice between an asset purchase and a stock purchase has tax and liability consequences for both parties.
- Is it free of legal, tax or other obligations? If not, what will be required to resolve them? Judgments, liens, and zoning or licensing matters can follow a business to its new owner.
- Is the company financially sound? Weak results do not necessarily rule out an acquisition, and some buyers specialize in underperforming companies. A sensible offer nonetheless requires a clear understanding of the financial position, including the working capital the business needs to operate.
A confidential valuation
A valuation establishes what the business would likely command today and identifies the factors that could improve its value before it goes to market.
Due diligence for sellers
Sellers benefit from conducting the same review before the business is marketed. An owner who understands the company’s legal, financial and operational issues can correct those that are correctable, present those that are not with appropriate context, and avoid having them raised for the first time by a buyer during exclusivity, when they are most likely to affect price or terms. Certain matters must be disclosed under the purchase agreement in any case, and a lack of awareness does not always relieve a seller of responsibility.
Sellers should also assess prospective buyers, particularly when the future of the business and its employees matters to them. It is reasonable to understand whether a buyer intends to operate and grow the company or to consolidate it.
Why it matters
Diligence allows both parties to reach a fair result on an informed basis. Even when the parties know and trust one another, it provides a clearer picture of the business and a sounder footing for the final negotiation.
We help owners and buyers prepare for diligence and manage it through a secure data room, so that requests are answered completely and on schedule.
To discuss the sale of your business, contact Twelve31 Advisors at 402-957-1231 or info@twelve31.com.
