The due diligence process is an extensive and grueling phase, starting the moment a Letter of Intent (LOI) is signed and typically lasts 60-90 days. This window of time is the Buyer’s chance to do a detailed investigation of the Seller’s information: financial records, contracts, customers, owner/employee salary and benefit details, legal matters (such as litigation or licensing), company policies and procedures, key suppliers and any other information the Buyer finds pertinent to the deal.
As a BUYER, here are some things you should DO during diligence:
- Provide extensive request lists. Immediately after going under contract, begin to think carefully about every facet of the business that you want to understand (financials, benefits, insurance, contracts, key customer relationships, etc.). Pull together comprehensive request lists (from your various advisors) detailing the specific information you want to obtain and give these to the Seller as soon as you can. Remember: if you don’t ask the question, you won’t get the answer.
- Ask clarifying questions. Dig deeper into the information that is the most important to the success of the business or anything you find out of the ordinary. This is your chance to wrestle with and understand the nuances of the business you are buying before you become the owner.
- Ask for the important items in several different ways. Are there several key customers with critical contracts? Ask for material contracts in the contracts section and major customer contracts in the customer section of your diligence lists. This requires the Seller to think twice (literally) and provide consistent, accurate information so you don’t miss significant details.
- Elicit professional help. As you dissect all facets of the business you are about to buy, experienced professionals provide valuable insight into your findings and ensure you are protected. Accounting firms ensure financials are in order, insurance brokers confirm adequate coverage, and lawyers verify that contracts, agreements, licenses and other legal documents are valid, binding and transferable. These licensed professionals will review the Seller’s business documents with an unbiased third-party opinion and assure that no element is overlooked.
As a SELLER, here are a few things you DON’T want to do during diligence:
- Give up confidential information too soon. Some of your company information is more sensitive than others, such as your full list of customers and your product pricing details. If you are under contract with a larger strategic buyer, especially any kind of direct competitor, you want to keep your highly sensitive information under wraps until preliminary diligence is confirmed and you have a high degree of confidence you will close.
- Go it alone. Pulling documents to fulfill your buyer’s diligence request list is extremely time-consuming and should not be attempted alone. As the President or CEO of your company, it is likely that your presence is valuable (and needed) in the day-to-day operations. Sellers who try to handle diligence by themselves put their business performance at risk during the lengthy diligence process. The best Sellers designate a controller, CFO or office manager/accountant to spearhead the process (digging up insurance policies, contacting benefit providers to transition policies, etc.), allowing them to stay focused on business operations and strategy. A knowledgeable right-hand man or woman is worth their weight in gold during diligence.
- Hire your attorney friend. As legal documents start to fly back and forth between sides, it is imperative you have an experienced, M&A attorney in your corner. Too many Sellers hire a lawyer they know through a friend or family member who specializes in a different field and is unfamiliar with documents related to buying or selling a company. Having the wrong attorney on your team, even if they are very well-intentioned, will cause confusion, frustration and delays in the diligence process. Use an M&A expert.
- Sell your company to a buyer you don’t trust. When closing day comes, you want to feel good about the buyer who will be taking the reins of your business to drive it into the future and take care of your employees. If character issues come up during the diligence process and you are questioning the integrity of your buyer, don’t be afraid to walk away, even at the eleventh hour. Trust your gut.
The due diligence process is the Buyer’s chance to look underneath the hood of the company they are buying. It is important to be thorough, while also keeping the process moving. Lengthy diligence phases often result in frustration on both sides and can kill the deal. By informing yourself about what to DO or NOT DO as the Buyer or Seller, you can do your part to keep the transaction on track to close in a timely manner.