What to Expect in Due Diligence
If you have never been through a due diligence you are likely in for a big surprise. For most sellers the due diligence process is stressful and demanding. Due diligence is often the most stressful part of any deal, for both buyer and seller. Knowing what to expect can greatly reduce that stress, make the process go more quickly, and also reduce the possibility of a renegotiation or cancellation from the buyer.
What is the Purpose of Due Diligence
Due diligence is the process a buyer goes through to verify the information that has been presented and ensure, as much as possible, that there have not been any significant omissions by the seller. Most of due diligence serves to verify the legal status, the financials, past history of the business, and your general ability to sell the business. In addition, a buyer may verify different aspects of the company to make sure it is in good health. In many ways, due diligence is akin to bringing a used car to a mechanic for a thorough inspection before you buy it.
A proper due diligence is important for both the buyer and the seller. With significant assets at stake for both parties, having a proper due diligence insures that the buyer is fully aware of what they are buying – including the risk – reduces the possibility of a dispute after the closing.
So while due diligence may be uncomfortable for the seller, a seller should take comfort knowing that a proper due diligence helps protect both the buyer and the seller after the sale.
You should always expect to verify your business with 3rd party documents. Bank statements, tax returns, merchant statements, corporate filings, etc. A buyer may request multiple forms of verification as well such as tax returns and bank statements.
Many sellers complain at the sheer volume of documents requested in due diligence. The fact is, document requests from buyers can lead to boxes full of information. If you are planning to sell your business in the near future (i.e., 3 months – 1 year) you should start preparing a due diligence package now. This will help reduce stress at the time of the sale. Most sellers are not prepared to provide all of the documentation a buyer will request and only start doing so when there is an offer on their business. By preparing ahead of time you can simply modify what you have already put together to match what your buyer is looking for. Sports Club Advisors can share with you a due diligence check list to help you begin to organize your due diligence files.
Expect Additional Requests
Due diligence usually starts with one list of requests and questions, but it almost never ends there. When a buyer starts to do due diligence on your business, they will likely do it in stages, focusing on the most important things first and then expanding their scope as they get comfortable with the most crucial items. As a result, sellers should always expect that due diligence will consist of multiple rounds.
One of the advantages of working with a broker like Sports Club Advisors is that we can help identify what are reasonable due diligence requests and when a buyer request is over reaching or becoming a stall tactic. Dealing with unreasonable buyer requests takes diplomacy and an independent,objective viewpoint which we provide.
In Conclusion, Have a Plan
As a seller, due diligence may seem like something you want to avoid, but for reasons covered above, due diligence actually benefits the seller as well as the buyer. As a seller, you should want your buyer to know exactly what they are buying so there are no surprises. Surprises after a closing often lead to arbitration or lawsuits, something that neither the buyer or the seller want.
Because of the detailed nature of due diligence, if you can prepare and gather your due diligence “data room” or file drawer in advance, before putting your company on the market, you will make your investment bankers job easier, create a favorable impression on prospective buyers, and eliminate one of the most stressful parts of the transaction for yourself.