What Is Due Diligence And When Do I Do It?

After you have met with the seller of the business, and analyzed the material made available to you by the broker, you will make a decision concerning your commitment to proceed with the purchase of the business. If you are serious, you will need to make an Offer to Purchase or provide a Letter of Intent, stating the terms of the intended transaction. The Business Broker can assist you with the preparation of this document, based on your terms. You can prepare an Offer or LOI all by yourself, or with the assistance of a trusted advisor. Offers can be legally binding, or NOT, depending upon the wording of the document, so you should be fully aware of the content. The Broker will present your Offer to the Seller. If the seller agrees, accepts your terms, you will continue the systematic process that will lead to a closing.

Due Diligence is the necessary investigation on the part of both the buyer and the seller to verify that each party understands what they are getting in the transaction. No one wants to be surprised at or after Closing. The parties will often have their CPAs participate in this process.

The buyer will want to verify that the business information he has received is accurate. This will entail, at a minimum, a review of the books & records of the business, counting any inventory, and surveying the equipment. Due diligence can be complicated with larger businesses, so there is no standardized list of usual items. The seller will want to verify the claims of the buyer regarding his business experience, creditworthiness, and available liquid cash for the business down payment. This is especially critical when the seller is considering financing the buyer for some portion of the Purchase Price. This may entail checking references, running a credit check, and reviewing copies of certain account summaries.