What is Due Diligence in a Business Sale?

If you’ve ever sold or purchased a house, you know that agreeing to an offer is just the first step in a long process meant to finalize the deal. You want to verify the information provided in the listing and make sure that everything is done correctly so the sale can proceed smoothly. 

The same principle applies to business mergers and acquisitions. As complicated as a home purchase is, though, business sales are much more complex. That’s why the due diligence period can last as long as six months or more. Due diligence looks different from company to company, but its main purpose is to confirm the disclosures provided by the seller. 

Setting the Scene

The digitalization of documents has made business sales a little easier. Rather than printing off thousands of pages of information, it’s quite easy to create a digital data room. Key members of the selling team can upload relevant documents into a password-protected space. If you are the seller, don’t feel obligated to upload forms if the buyer didn’t ask for them. Before sharing any proprietary information, be sure to have all parties sign a non-disclosure agreement. 

What Does the Seller Want?

Again, every deal is unique. What’s important in a manufacturing merger or acquisition might be inconsequential in the sale of a tech company. Generally, though, the buyer wants to verify cash flows, liquid assets, revenue figures, and current debt. Tax returns from the last few years will also be of great interest to the buyer. 

In many deals, buyers want to look at much more than financial figures. Buyers often request copies of contracts with vendors, suppliers, and outside service providers. Internal contracts warrant just as much attention, though. Executive compensation agreements, non-compete agreements, and employee handbooks are usually scrutinized. It’s also not uncommon for the buyer to run background checks on any employees who are expected to continue working for the new entity. 

Sellers should communicate any legal risks to the buyer. Pending lawsuits are of great importance for buyers, as are any “hot spots” that possibly portend future litigation. Liens and levies are usually relevant. Even past judgments against the company or its employees should be disclosed to the buyer. 

Conclusion

Due diligence is, no doubt, taxing to all parties involved. Sellers are often irritated, sometimes offended, and always fatigued when the process is over. Having the right legal counsel by your side can help you get over the finish line with your priorities intact. We’re happy to help you get your business where you want it to go; contact our team today to set up your consultation.