We just finished negotiating with a buyer and received a signed letter of intent detailing out the terms of the arrangement.  The seller wanted to go out and celebrate the occasion until I told her that the hard work was just about to get started.  She looked at me the same way as I looked last summer when I was backpacking and I hiked, sweat, and bled to get to the top of the mountain, I thought, only to see another peak in front of me.  She gave out a big sigh and, with a beaten look in her eyes, she asked, ”what’s next?”  I told her that the offer is a great start but in order to finish it we need to go through due diligence.  She asked what it meant, knowing that the term sounded familiar but couldn’t remember what we… talked about before.  She was focused on the buyer and the offer but was not ready to think past that step when we talked before.  Now she is ready to listen.

The due diligence process is basically a fancy word for an inspection.   When I refer to an inspection it can be as easy as a couple of hours reviewing the books, checking with the State and verifying the equipment all the way to a 4-6 week deep dive into every lease agreement, legal contract, debt arrangement, employee records, equipment valuation, etc. Consider it like this, when you buy a car you want to open the hood, kick the tires, take it for a ride, maybe have some professional look at it and generally see if it is everything you thought it would be.  The same thing happens when you buy a business and that’s called the due diligence process.  It usually happens the same time the financing documents are being drawn up and the legal agreements are being put together.

The due diligence process can be very touchy, especially when your competitor is looking to buy you out.  You need to be very careful of what you show your buyer and, unfortunately, there are no laws associated with what the minimum requirements are to provide a buyer.  The general rule is that the buyer makes a request in writing of what they want to review before the process starts.  The seller reviews this list and then negotiates what is available, makes suggestions on how to answer any concerns, and denies requests they feel are too personal or unnecessary.  A typical example of a touchy situation is meeting the key employees.  Most sellers try not to tell their employees anything is going on until the deal is basically done.  The buyers want to meet and interview the key employees and make sure that they are staying as well as validating what the seller has pitched.   When this meeting occurs is up to the two parties and should be worked out early in the process.

Generally speaking a good seller should have an open office, books and policies to anything the buyer wants to see. On the other hand, the buyer should be sensitive to privacy, timing, and relationships that the seller needs to maintain.  The seller wants as little disruption to an existing company as possible so they can focus their time on running the Company until the hand off.  The buyer needs to get enough information and validation so that once it is handed off, they can continue to execute at the same level or higher.

I don’t care if you are the buyer or seller, just be reasonable and fair during the due diligence process.  Too many good deals are blown up here due to emotion.  Sellers often want to hold back information they feel is unnecessary and buyers start to not trust the seller.  My advice is to only ask for what is needed, not a ”like to have” and try to focus on the process as quickly as possible to minimize the disruption of the company.  Remember you don’t have to know how every piece of the car engine works in order to drive the car off the lot.

This entry was posted on Wednesday, July 22nd, 2009 at 8:11 am and is filed under Sell Your Business, Exit and Answers, Buy a Business. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.