What Is Due Diligence in a Business Sale?

Whether you’re selling a business of your own or looking to make a big acquisition, due diligence will need to be completed before any money changes hands. The seller can facilitate and make the process easier by being responsive and accommodating.  The buyer needs to understand that “due diligence” is critical to understanding what they’re buying, it’s value, or the reasons why they should pass on the deal.  This process is crucial to ensuring for both sides that if they’re proceeding, a transparent due diligence process will help the deal go smoothly so seller gets paid and Buyer gets what they paid for. Those going through their first sale may be intimidated by the process, and understandably so – poorly conducted due diligence could kill a deal outright. Keeping these points in mind through your next sale or acquisition can help ensure that things proceed smoothly.

Evaluating a Business

There’s no doubt that the party with the most risk – and therefore in need of quality “due diligence” – is the Buyer.  The general purpose of due diligence is to ensure that the business really is what the seller purports it to be. Consider the process of due diligence similar to touring a home before buying it, and having a home inspection done. This process allows you to actually see what you’re buying, and an inspection ensures that there aren’t any serious issues lurking where you can’t see them. Most people wouldn’t buy a home without touring and inspecting it first, and similarly, most business buyers won’t go through with a deal without proper due diligence. 

Buyers will primarily be concerned with the financials of the business. Typically, a seller will have the business’s financials audited by an accountant, and provide that information to the buyer. If you plan on selling your business, conducting this audit ahead of time can save a lot of time in the already lengthy due diligence process, and instill faith in the buyer that you’re confident about the process.

Next, it’s time to examine your contracts. Buyers usually have two major concerns when it comes to contracts: their terms and their assignability. Long-term contracts, such as leases, may discourage buyers if they’re not happy with their terms. The assignability of contracts is their ability to be transferred to the new owner, without permission from the other contracting party. For some businesses, their contracts are what makes them profitable – if these contracts aren’t assignable, buyers may fear that they’ll dissolve once the purchase is made, leaving them stranded with a very costly investment. 

Buyers will also want to know how the business will fare after a sale, including how well the two companies will integrate, whether or not customers will still interact with their business after an acquisition, and how employees will respond to the merger. All of this information will serve to inform the buyer on whether or not the acquisition is actually the deal they’re looking for, and they may still request more information on other specific details. If you’re entering into a sale transaction and need help in preparing for due diligence, or are purchasing and want to ensure that due diligence is conducted properly, don’t hesitate to give me a call today at (407) 204-3116, or email me at: carlos.reyes@gray-robinson.com.

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Reyes Law Group

Reyes Law Group represents clients in a multi-disciplinary legal practice involving real estate transactions and litigation with a “footprint” that covers the State of Florida. Over the firm’s first 10 years, Reyes Law Group has closed over $100M in commercial closings, representing buyers and sellers in contract negotiations, due diligence, and the related title review and policy issuance related to closings. In litigation, the firm has commercial litigation experience focused on prosecuting or defending claims such as breach of contracts, partition actions, trade secret violations, and breach of non-competes. However, our firm’s MAIN FOCUS is assisting asset and loan portfolio managers, investors and private lenders with a “ 4-PILLAR APPROACH” to the legal challenges they face with non-performing assets: 1) LOAN WORKOUTS; 2) COMMERCIAL FORECLOSURES (across the State of Florida); 3) COMMERCIAL EVICTIONS; and 4) REO COMMERCIAL CLOSINGS.30+ years’ legal experience means - WE CAN HELP!

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