Getting through buyer diligence

The short version

• Due diligence is the buyer's full check of your business after the letter of intent is signed.
• The buyer's accountant, attorney and lender will go through your records, contracts and operations in detail.
• A complete, organized data room is the best way to keep it short and keep the price intact.
• Answer requests quickly, completely and in writing. Delays and gaps make buyers nervous.
• Anything significant the buyer finds that you did not disclose can cost you price or the whole sale.

What due diligence is

After you sign a letter of intent, the buyer and their advisors check everything they have been told. They confirm your earnings, read your contracts, look at your equipment and learn how the business really runs. Their lender runs its own review at the same time. Lesson 9.3 covers the lender.

What they will look at

• Financial. Tax returns, financial statements, bank statements, add-backs and monthly results. Often a quality of earnings review. Lesson 5.4 covers when one is required.
• Legal. Formation documents, contracts, leases, licenses, permits and any disputes.
• People. Payroll, pay rates, employment agreements and who holds key knowledge.
• Customers. Revenue by customer, contracts and retention.
• Operations. Equipment, suppliers, systems and procedures.
• The site. A visit to your location, usually after hours.

Lesson 2.6 lists what goes in a data room. Lesson 5.2 covers how to build it.

How to make it go well

• Have the data room ready before you sign. Most of the work should already be done.
• Name one point of contact. Usually you or your [broker](/learn/reference#business-broker "A person or firm paid, usually a percentage of the sale price at closing, to value a business, prepare the materials, find and screen buyers and manage the process. What a broker does and does not do is its own piece."), so requests do not get lost.
• Track every request with the date asked and the date answered.
• Answer in writing, and put the answer in the data room so every advisor sees the same thing.
• Disclose problems early. Lesson 6.4 covers why.
• Keep running the business. Lesson 9.2 covers this.

When the buyer finds something

Every diligence turns up questions. Most are answered easily. Some matter: a customer who has left, a lease that cannot transfer, earnings lower than presented. When that happens, the buyer may ask for a lower price, a change in terms or more time. Lesson 9.4 covers what to do.