Signing a letter of intent to sell a business is a big step for a business owner. However, before the proverbial ink on the LOI dries up, the due diligence process begins, and many businesses need to prepare for the depth of the examination that follows. While business owners often dread the process, they should remember that it is their opportunity to make their business shine.
Due diligence lets the potential buyer get a complete picture of the seller’s business and spot any hidden risks. The results may influence the structure of the transaction and the determination of the purchase price. The buyer’s legal team will dive deep into the seller’s organizational documents, licenses, leases, contracts, employee, vendor, customer records, intellectual property, and assets.
To their dismay, many small business owners discover at the last moment that their financial reports and business are outdated or incomplete. They desperately try to locate or recreate missing documents. Such last-minute record fumbling is taxing for the seller’s team and disrupts their day-to-day responsibilities and performance. It may also create a perception of operational difficulties, which is hard to dispel later. Some buyers may overlook a minor operational issue in favor of strong financial performance or an impressive client account portfolio. However, if the buyer isn’t happy with the results of the investigation, they have the right to withdraw from the transaction. (For this reason, the seller should never make the business records available in the due diligence process without having the buyer sign a non-disclosure agreement, even if sensitive information is redacted). The buyer will move to the preparation of the definitive purchase agreement only after due diligence is completed to its satisfaction.
Due diligence is an excellent opportunity for the owner to make the business more attractive to potential buyers. It increases the buyer’s confidence in the business and its leadership and validates their expectation of a good return on their investment. Responding to due diligence requests in an organized and complete manner enhances the impression of the seller’s professionalism, speeds up the due diligence process, and improves the odds of a successful closing.
