Due diligence is a critical aspect of any business acquisition. It gives the buyer the opportunity to review the prospective business’s financial records, contracts, assets, sites, employment records and other pertinent information about the business and to ensure the value of the business. And, not only do you want to ensure a Due Diligence Period, you also want to ensure that you can terminate the transaction at any time before the end of the Due Diligence Period. In other words, if you discover something during the due diligence period that is alarming, devalues the business or for whatever reason, you want to make sure can simply walk away or use the information to renegotiate the terms of the transaction.
The scope of Due Diligence, how long it will last and what information the buyer will have access to, is agreed to in the Purchase Agreement. What a buyer actually reviews in due diligence and the level of scrutiny used in the review will depend on the reasons for the acquisition. For example, if a buyer is primarily concerned with acquiring the intellectual property (IP) portfolio of the business and is not concerned with the business as an on-going concern, that buyer will look carefully at the IP to ensure the business’s IP is protected, but may only make a cursory review of the business’s finances. Conversely, if the buyer is acquiring the business to be the buyer’s primary source of income, that buyer will be very concerned with and take an in-depth review of the business’s finances.
How you structure your due diligence process is critical to protecting yourself in the transaction. It is important for you to ensure there is enough to conduct a proper review, that the right documents and information are obtained from the seller, and that you assemble the right team to help you review. The Due Diligence Period can vary from a couple of weeks to several months depending on the type of transaction, the size of the transaction, and what specific inspections/reviews will be needed for the particular industry.
Items that you most likely want to review during the Due Diligence process include, but are not limited to:
- Financials: tax returns and financial statements (Balance Sheets and Profit and Loss statements) and the source documents that verify that information, business loans, liens or other encumbrances;
- Legal: any and all existing contracts, alleged breaches of contracts (by the business or the other party), leases, insurance coverage, employee records/contracts current litigation, threats of litigation, and the business’s debts;
- Operations: site visits, review of marketing materials/strategy, processes, relationship with suppliers, vendors, customers, etc.; and
- Assets: proof of ownership for tangible assets (receipts, title, bill of sale) and intangible assets (federal registration (pending applications thereof) and assignments).
Lastly, it is prudent to put together a solid team to assist you with your Due Diligence review. You want to have someone with financial expertise, such as a CPA, to help you make sense of the financial records. You should have legal expertise on your side to help you assess the business’s liabilities and legal vitality. And, if you are financing the deal, you should have your banker involved in the process as well.
Ser & Associates regularly assists clients in buying businesses, including guiding them through the Due Diligence process to ensure the right information is received and reviewed, and that the right questions are asked. If we can assist in you in purchasing a business, please call us at 305-222-7282.
For more information on the Due Diligence process and business acquisitions, be sure to check out the Ser & Associates Entrepreneur Workshop video “Business Acquisitions”. Also, please be sure to follow us on Instagram, Facebook, and LinkedIn.