In the past, we’ve written about Due Diligence from a Seller’s Perspective, but this month we’ll take a look at it from the other side…from the buyer’s perspective.
After a buyer has issued a letter of intent and the seller has agreed to the basic price and terms of the proposed deal, it is time for the buyer to conduct due diligence. A solid due diligence process will minimize the buyer’s risk, detail customer and supplier relationships, define key management, confirm that all financial information is accurate, and uncover any potential skeletons in the closet.
The buyer will issue their list of items to be reviewed. The level of detail required can depend upon the size and type of company being acquired, how much information was exchanged in early discussions, whether financials were reviewed by an outside CPA, and other factors. We’ve seen lists that are anywhere from three to 20 pages long. Following is a list of potential categories to be explored.
- Tax Matters
- Employee Benefits
- Management, Personnel and Consultants
- Corporate and Organization
- Contracts and Liabilities
- Intellectual Property
- Real Estate
- Personal Property
- Internal Controls and Security
- Environmental Matters
Keep in mind that each category may have a list of 20-100 questions or documents that are required. For example, under Financial, a buyer may ask for the last five years of year-end accrual financial statements and tax returns, the last two years of monthly financials, monthly breakout of revenue by product/service, and bank statements, quarterly detailed A/R and A/P, a detailed inventory list, and more.
And on top of the standard due diligence issues, a buyer will likely have questions about how the business fared or changed during the current pandemic. If the business merely survived, they’ll want to know what strategies worked to maintain the business. If the business thrived during the pandemic, they’ll want to know whether the growth is sustainable. If they determine that it is sustainable, they may be willing to offer a premium price based on the trailing 12-month financials. If they’re not confident the business will continue at the current pace, they may propose some cash at closing with a seller note or earn-out to be paid over time.
There is no limit to the information the buyer can request, but your M&A advisor will manage the process and ensure that different types and levels of information are released at the appropriate time. For example, you may wish to withhold information about employees until just before closing.
Call us at 913.648.0185 for advice on due diligence or any other aspect of selling your business.