What Is Due Diligence?

due diligenceBusiness owners who have been running their companies, managing their employees, and setting and achieving goals for years often find the process of selling their business daunting. In fact, many small business owners try to sell their businesses themselves first and fail. There are a number of reasons for this, but one of them is that they don’t understand exactly what the process entails. The primary steps involved are:

We’ve written about some of these topics before, but today we are going to discuss the critical part of the process of buying or selling a small business called due diligence. So, what is due diligence?

Due diligence is “the process by which business owners conduct a business, legal, and financial investigation of a company in preparation for a possible sale transaction.” This is the buyer’s opportunity to investigate the business completely in order to get a complete idea of its strengths, weaknesses, value, and future. What kinds of things are buyers allowed access to?

  • Tax returns
  • Financial statements
  • Contracts
  • Leases
  • Real estate paperwork
  • Accounts receivable
  • Licenses and permits
  • Intellectual property
  • Inventory
  • Business records

While sellers rightly balk at the idea of letting anyone dig through their private company records, remember that only buyers who are qualified, committed, and have signed a Letter of Intent, agreeing to a certain price and terms, are given this opportunity. Buyers need to negotiate in good faith, knowing that nothing is being hidden from them and that they will not be purchasing a company with pending lawsuits, legal problems, or financial problems or liabilities that extend far out into the future. No one wants to buy a pig in a poke, essentially.

Why is due diligence critical? It’s critical for a number of reasons. The first is stated above: both parties will learn about the business, how it operates and how well it is operating currently. This is not just good for the buyer. In fact, conducting due diligence before a sale can be beneficial for the seller as well. When problems are discovered and can be resolved before price negotiations occur, the seller has a better chance at getting an offer that is in range with his needs and wants. Also, due diligence allows for both parties’ legal teams to be able to draft the kinds of documents necessary to ensure a smooth business transaction and transfer process. Without those details, this would be impossible.

If you have any questions about due diligence and how it can impact a sale, we at Calder Capital would love to discuss our own process and where that factors in. We have considerable experience walking buyers and sellers through the steps and know the kinds of problems or surprises that are likely to come up. Call us today if buying a business or selling one is in your future. The sooner you begin to plan, the smoother the process will be.

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