Due diligence is a critical phase in the sale of any business when the buyer and his/her trusted advisors perform several kinds of audits to: (1) Confirm everything the seller has represented about the business is true and (2) Make certain that there are no hidden surprises. When the buyer’s due diligence uncovers serious discrepancies/ deficiencies, it is not uncommon for the buyer to require a significant reduction in the purchase price and/or a significant tightening of the terms in order to still close the deal. Frequently, the deal may fall apart altogether if the deficiency is serious enough.
Due diligence usually begins after the parties have agreed in principal to the price and general terms of a deal, and usually requires 30 to 90 days, depending upon the complexity of the business. It has at least four phases: Legal, Financial, Environmental and Operational, which typically proceed in parallel.
The buyer’s attorney usually leads the legal phase, which seeks to confirm that the business is now and will continue to be properly licensed, that there are no lawsuits pending against the company, and there are no problems in transferring the company’s contracts with its existing customers and vendors.
The buyer’s CPA/ accounting firm will usually lead the financial phase, which seeks to confirm that the business books and records accurately represent the current financial condition of the company. The buyer’s bank will also have their own list of questions regarding the business’ financial condition, which must be satisfied before they will approve the acquisition loan. During this phase, the bank will also require independent appraisals of the business’ assets. If these include real estate, either owned or leased, the bank will no doubt require an environmental phase one audit, depending upon the nature of the business.
Operational due diligence is usually conducted by the buyer’s own management team.
During due diligence, the seller is likely to feel like the company – and perhaps even the seller personally — is being put under a high-powered magnifying class, which can be pretty comfortable even when it goes well. An experienced M&A advisor can be of great assistance during this phase by coordinating and simplifying the information requests from these various sources. In some cases, we can identify those requests that aren’t relevant or material for this business, or by suggesting some alternate ways to get the buyer the basic information he/she requires from readily available sources/ reports, rather that initiating a time consuming special study.
If you know of a business owner who’s thinking of selling or buying a business and who might benefit from a complimentary consultation with us, have them contact me, or any of the M&A professionals at www.bradwaygroup.com
By: Mike Ertel, Transworld M&A Advisors