The Due Diligence is a process whereby the purchaser will do ‘a health-check’ on your business, ensuring it actually performs as well as we said it is performing. The standard time allowed for a Due Diligence period is usually between 10 and 15 days.
It is important you understand what a purchaser will be looking for and why. Depending on the size of the business, they can ask anything they want, and they don’t need to provide a reason why they would cancel the business Sales & Purchase Agreement before it became unconditional.
Due Diligence Checklist
Here you will find an indicative list that most advisers (usually accountants and lawyers on the purchasers side) would require. It’s nothing more than a checklist that, if you can answer most questions and tick most boxes, should make you more comfortable with the process.
See if you can do a Due Diligence on your own business and, if you would be selling now, what shortcomings can you find? Click to download the Due Diligence Checklist (no email required)
It is important that you are prepared for this Due Diligence process before you get an offer to review!
When does a Due Diligence start and what does it mean?
In most cases the Due Diligence period starts on the first working day after the date on the agreement. However, where the purchaser is a strategic purchaser (from within the industry) we recommend that the Due Diligence starts on the first working day after the Finance Clause has been satisfied.
Definition of a Due Diligence – DD;
1. An investigation or audit of a potential investment. Due Diligence serves to confirm all material facts in regard to a sale
2.Generally, Due Diligence refers to the care a reasonable person should take before entering into an agreement or a transaction with another party.
As this definition suggests, all aspects of your business could be scrutinised if there is a reason to believe that a Vendor is not disclosing any information. These aspects could involve financial records regarding sales figures, expenses (personal or business), ird statements and payments etc.
As a Vendor you can choose not to disclose certain information, and it is within your rights! (a common item not to be disclosed is the balance sheet) However, not disclosing a particular part of any Due Diligence checklist could result in the purchaser thinking you are hiding ‘something’.
In most cases (on a case by case basis) I would recommend to show anything they’d ask for, just so it doesn’t feel to them you are hiding anything. And let’s be honest, most businesses have nothing to hide. A simple explanation [with most affairs] is often all that is needed to ensure it would not become an issue later on.
Besides the financial records, the Purchaser can also request operational documents like franchise agreements, employee records, insurance claims, supplier contracts and distributor agreements etc. Usually a contract allows 10 to 15 working days for a Due Diligence period.
Even though this process sounds scary and (can certainly be) an invasion of privacy, under most circumstances there is nothing to be worried about. As an experienced Business broker I had very few business sales fall over during Due Diligence, due to a set procedure we follow during the sales process.
Also, with the availability of affordable software solutions these day, most businesses are well documented with files and financial records easily available from onsite servers or cloud based solutions.
It is important to know that a Vendor can also perform a Due Diligence on the Purchaser. One of our main jobs, as a responsible Business Broker, is to ensure the Purchaser has those resources before the purchaser signs an offer to be presented to the Vendor.
If any issues are uncovered during the Due Diligence it is possible for the Purchaser to either re-negotiate or withdraw from the contract all together.
For a Purchaser it is important to know that, if you ‘dig deep enough’, you will always find something. In my experience, most of the business purchases are not cancelled in this stage of the sale process. As a responsible Business Broker I focus on key information, disclosure where needed and a good working relationship between Vendors, Purchasers, their advisers (lawyers & accountants) and myself, the Business Broker.
FREE LINK Northland downloads:
FREE Booklet outlining the sales process: Managing The Sale of Your Business
FREE Booklet outlining other options to an Exit Strategy