What is due diligence? Why does a buyer need to perform due diligence? What information, records, and/or financial materials will the buyer want to access? How long will due diligence take? As a business owner preparing to sell my business, when should I start preparing for due diligence? Above are common questions sellers ask, never having sold a business before and wondering what the importance of due diligence is, and why they have to provide a buyer with all the detailed and sensitive information buyers and their accountants ask for.
If you are working with a professional Business Broker in Orange County they will guide you through the process and advise you on how to prepare. Your CPA will be a key advisor in Due Diligence and you should involve them early in the process so they are prepared when an offer is made.
Due diligence is the review by the buyer and/or their CPA, after an offer has been accepted, of your business’s financial statements, employee, vendor, customer (names redacted if needed) records, insurance policies, business licenses, and material contracts generally for the last three years.
The buyer has based their offer on the information provided and needs to confirm that what was represented to them is true and correct.
Due Diligence is normally a contingency in the Purchase Agreement and If there are any inconsistencies found the buyer can choose to renegotiate or cancel the Purchase Agreement. If you want to learn more about due diligence and be aware of scams when selling your business speak to one of our Business Brokers.
Below is an example Due Diligence List of information that buyers and/or their CPAs might request. The list can vary according to industry and size. These are common items that will need to be gathered and readily available when an offer is made. For simplicity and convenience, most items can be added to a Dropbox file that your Business Broker sets up to help keep track and facilitate the Due Diligence process.
The length of time it takes to perform Due Diligence will depend on the size, industry, and complexity of the business operations. Generally, the buyer is given 3 days to prepare a Due Diligence list, the seller has 5 days to gather the materials and the review of the materials typically takes two weeks to complete after receipt of the information. On larger, more complex transactions the review of the material can take up to a month including an attorney’s review on the buyer’s behalf.
When you list the business you will be asked for some of the information needed for Due Diligence in addition to the amount for Owner’s Add Backs. When starting the listing process it is a good practice to separate your receipts and details for personal and owner’s expenses so they will be readily accessible when an offer is made and accepted.
If you have any questions during the Due Diligence process Pacific Business Sales, as the best business broker to sell will assist you every step of the way and keep you informed to help you navigate due diligence and the entire process for the sale of your business for a smooth and successful outcome. That is why it is important to pick the right Business Broker to sell your business and help you with this process