26 May Buyer Due Diligence
One of the most infamous questions we receive is: is buying a business harder than selling a business? The answer is quite simple in nature. If you are the buyer then buying a business is harder. If you are the seller, then selling the business is harder. If you are a lender, then you would say approving a loan is harder. If you’re a business broker like Aldrin, the answer is: the process is difficult for each side of the deal and will only get done if there is a willing buyer and a willing seller with no pressure to do the deal and both parties are well informed and educated about all facets of the deal to conclude the purchase.
Perhaps the greater truth in all this is that each party considers their side of the deal the most difficult and that’s because they see things from their own perspective.
Seeing things from each other’s perspective comes into play during the due diligence phase. It would be normal that the seller and buyer are very uncomfortable with each other because they are negotiating head to head to try and get the best deal possible. Now that the negotiations are over, the transaction moves into a due diligence phase where the buyer verifies the representations of the seller and the seller is equally curious to know the buyer can follow through on their representations. An example would be getting third party finance approved, being approved by the landlord, being able to qualify if the business or practice has government mandated licenses and much more.
As a rule, however, the purpose of due diligence is to protect the buyer and make the acquisition they are after allows what they want to do which is purchase the business from the seller and continue to profit as the seller has stated and more importantly, better the profit the seller was making.
If you are the buyer of a business, here’s 6 things to watch from your perspective as you move through the due diligence process:
Understanding a Purchase Agreement or Letter of Intent
The Purchase Agreement or Letter of Intent would detail what will happen during the due diligence period. Some agreements and letters do not break it down very well so make sure to clarify the points and that it is crystal clear.
It is normal for the seller to agree to open due diligence if the buyer pays a nonrefundable deposit. The buyer does not want to lose any money in case they discover items in due diligence and they no longer wish to make the purchase. Therefore – always make sure it’s clear. If deposits are paid, are they refundable and if so, under which conditions?
Making sure the Agreement or Letter of Intent reflects Your Needs
It sounds like a thing of common sense but sometimes the Purchase Agreement or Letter of Intent might not reflect what you want. The buyer gets deeper into a transaction and they get overwhelmed with additional information. Regardless, it’s the buyer’s sole responsibility to ensure they are clear on all the details, especially those in writing as this is their security if something should go wrong or if there are any misunderstandings.
Go a step further and create a checklist of items to accomplish during due diligence and include how long you expect each item to take, prioritize the importance of each item and if the item is contingent about something else happening or not happening.
If it helps, get the help of a professional whose job it is to look after your interests and/or explain things to you.
Turnaround Time For Due Diligence
The seller usually wants due diligence to be for the shortest time period possible. The buyer generally wants to take as much time as possible and they don’t want to feel rushed and therefore make any mistakes and they want to make sure they get answers to each and every question. A lot of sellers make the mistake of being reluctant to share too much information in case the buyer backs out of the deal. The hesitation is reasonable and the goal should be to share what is not commercially sensitive information such as the name of contacts of customers until the transaction closes.
There is no specific ‘normal’ period of time for due diligence. This varies from transaction to transaction. The more complex the deal, the longer the due diligence.
Managing Due Diligence
The most important thing is for the buyer to feel comfortable working through the due diligence process by removing each contingency in writing as it is satisfied. The buyer can show good faith to the seller by signing a document agreement as each contingency is met and the buyer is satisfied.
Just like the negotiating is difficult, the due diligence is equally difficult. If the buyer and seller have been able to get to this stage in the transaction, they need to continue to work together. The best way to do this is for each party to demonstrate goodwill and patience towards each other.
Patience is a virtue. If the buyer feels their questions are unreasonable, the seller is slow to respond with answers or documents they need then the buyer can simply walk away. Equally, sellers become frustrated especially if the buyer is slow to ask for information and appears to be dragging things out. Both buyer and seller are unsettled by this major change happening in their lives, that is, the seller is letting go of the business but it’s also been part and parcel of their lives. The buyer is dealing with emotions of taking a big risk and having to deal with what we all hate in life…that is… the possibility of failure.
Hire a Pro
While there are many items to address during this process, the most simple and straightforward processes can still be confusing under normal circumstances. A buyer conducting due diligence on one of the most important decisions of his or her life is not a normal circumstance. Getting help from a professional in the business is simply good business decision making.
As a business broker in the transaction, my role is to protect both buyer and seller and Aldrin do this by making sure all requests are clearly communicated to both parties, its agreed what needs to be done and how quickly it will be done. If the buyer requires advice on a tax matter we refer them to a CPA or tax professional so they get the right answer. If the buyer requires legal advice, we refer them to a business transaction attorney. That is, we refer them to the right attorney.
We’re here if you have any questions.