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Trent Lee FCBB Agent

What does Due Diligence mean? It is the reasonable steps taken by a person in order to satisfy a legal requirement, especially in buying or selling something.  Once an offer has been made and a letter of intent (or asset purchase agreement) accepted the buyer will perform their due diligence to ensure this is the right business for them to purchase.  A buyer will perform their own due diligence to ensure the business’s financials and characteristics are as advertised.  You will want to enlist the help of a professional business broker and an accountant for this process.

What is the Length of the Due Diligence Period? - The due diligence process should typically last between 7 to 45 days. This is possible to complete with the assistance of a professional business broker and an accountant.  It is important to not take too long and get the deal closed as soon as possible. However, you still want to take the time to go over all the details, examine the information, and review in detail to locate any possible issues or problems the business may have. 

Financial Statements, Profit and Loss Statements, and Tax Returns - Both the buyer and the seller will want to examine each other’s financial statements.  The buyer is going to review the businesses’ financial documents including the balance sheets and income statements, inventory schedules, future forecasts and projections, revenue, profit, and growth trends, stock history and options, short and long-term debts, tax forms and documents, and valuation multiples and ratios in comparison to competitors and industry benchmarks to see the history of the business and its opportunity for growth.  The seller will review the buyer’s financials, credit report, and tax returns to see if the buyer pays their bills on time or has ever filed for bankruptcy.  Both parties should use an accountant to perform the reviews. 

Business Plans - Both parties should share their business plans.  This buyer will be able to see the current seller’s business plan and see where adjustments or changes need to be.  Will the buyer need to hire new staff, change vendors, etc.  The seller will be able to see the buyer’s business plan to let them know the new buyer understands the business and will be able to run it successfully.  

References - Professional and Personal - Each party should provide a list of professional and personal references that can vouch for their credibility.  If contact with the references needs to be made then both parties need to agree on guidelines on how the references will be contacted.  Remember the selling of a business is usually highly confidential so it needs to be kept private to protect each other’s business.

Performing due diligence is a vital step for both the buyer and the seller when purchasing a business.  It will help both parties decide if the deal is right for both sides.  It is important to enlist the assistance of a professional business broker and an accountant to help with ironing out the deal and making sure all the information is collected and reviewed correctly.