Do Your Due Diligence, But Heed Your Gut Instinct

November 1, 2017|

By Tim Dalton

The process of buying a business involves some preliminary review and analysis in order for a buyer to provide a seller with an Offer to Purchase or Letter of Intent.  The Offer to Purchase allows the buyer and seller to agree on a price and terms for the sale, while still permitting the buyer to conduct a full investigation of the business if there is an understanding on pricing. This investigation is most often referred to as due diligence.

The preliminary information provided to a business buyer is a business summary prepared by the seller’s business broker or representative that gives a general overview of the business accompanied by some summary financial statements. This is obviously not enough information to make a full commitment to purchase the business, but preliminarily enough information to determine if the sales price makes sense for the buyer.

Ultimately, there is a lot of time, energy and sometimes money that goes into due diligence. To get that process started before there is agreement on pricing and terms can be a waste of resources.

However, when the buyer and seller have come to terms on the sale, then the due diligence period starts. The goal of the diligence period is to investigate the business for deficiencies, verify financial and performance information, get a clear understanding of operations and key employee roles, investigate customer makeup and retention and whatever else is deemed important to the buyer.

There is never a standard, complete list of diligence items, as purchasers become comfortable with a business at different levels of investigation. I have been surprised by how little some buyers have investigated a business, but I’ve become a little frustrated with how in-depth others have gone.

At the end of the day, though, diligence is the responsibility of the buyer and it is up to them to get comfortable with the business to close on the sale.

So who do you get involved in the diligence process? Most likely an accountant to help with a financial review of the business to verify cash flow, assets and liabilities. Then maybe look forward with financial projections and tax implication strategies. The accountant can help with the allocation of the purchase price for the various assets of the purchase. An accountant may even be able to give some advice on improving the financial performance of the business.

Another adviser would be an attorney that can help with drafting or reviewing the purchase agreement, non-compete and other legal aspects of the sale. An attorney may be able to investigate and advise on any serious legal issues the company previously experienced or help with regulatory, licensing or other legal advice a buyer may not be able to get comfortable with on their own.

A third adviser may be someone who is already in the type of business that you are considering buying. They would most likely have to be outside of the area, as most owners are not interested in helping a competitor. But many are happy to offer advice about the pros and cons of the industry and can alert a buyer about an aspect of the business operations they may not have considered.

The diligence process of buying a business is probably the area that needs the most attention.  But with that said, the buyer will most likely make a decision that is based on instinct as much as on the diligence of the business.

Every business purchase has a certain amount of risk. Most trusted advisers, such as your accountant and/or your attorney, will rarely give the opinion that you would be foolish to not buy the business. We hire advisers to protect us, and the ultimate protection would be to not buy the business. Therefore, investigate, listen to your advisers, but also listen to what your gut tells you.

Business ownership is a wonderful thing when you have the right business for you.

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