Due diligence is an important part of any business sale, but this step can make any seller squirm. Handing over precious information can leave you feeling exposed and defensive – do they really need that? Understanding what due diligence is all about can ease the pain and help keep those boxing gloves tucked away.
- What is due diligence?
- When does due diligence begin and end?
- What will the buyer look at?
What is due diligence?
The buyer’s goal is to validate information stated in the confidential information memorandum (CIM), to gain a fuller understanding of the business and to determine if there are any other liabilities not detailed in the CIM prior to purchase. Due diligence is the process of reviewing relevant documents or physical assets in order to accomplish this.
When does due diligence start and end?
Due diligence begins after a Letter of Intent (commonly referred to as LOI) is signed. The LOI puts the search for negotiations with other potential buyers on hold. You and the buyer are serious about striking a deal. Well before due diligence, a non-disclosure agreement should have been signed to ensure all information remains confidential. Generally, the buyer has 30-45 days to perform due diligence.
What will the buyer look at?
Buyers will often want tax returns, bank statements, copies of leases, contracts, patents, and so on. A closer look at equipment and other physical assets being transferred is also common. Request a comprehensive list of due diligence items at the start to help the process go more smoothly. Discuss the list and any concerns with your M&A Advisor to ensure items requested are reasonable and appropriate. Having a list from the get-go also helps you provide requested items more quickly, making the buyer happy and more confident.