Due diligence is a critical phase in the business acquisition process, providing an opportunity for the buyer to thoroughly examine the business in question. Here’s what to expect during this crucial stage:
- Initial Information – The Business Listing Information (BLI): As a prospective buyer, the first detailed glimpse you get of the business is through the BLI. This document offers comprehensive data certified by the business owner, covering financials, leases, and other relevant details. At this stage, the information should be assumed accurate but not guaranteed.
- Pre-Due Diligence Offer and Agreement: Typically, due diligence commences after an initial offer is made and terms are agreed upon, contingent on the satisfactory completion of due diligence. This means the offer is subject to confirmation of the details provided in the BLI.
- The Due Diligence Process: This phase allows the buyer to inspect all business records and verify the accuracy of the information provided. It involves detailed scrutiny of financial statements, contracts, customer data, and other operational aspects of the business.
- Collaborative Meetings: The broker facilitates meetings between the buyer and seller to address and resolve any concerns. This collaborative approach aims to satisfy the buyer’s inquiries and reach mutually agreeable solutions.
- Outcome of Due Diligence: If the buyer is not satisfied with the findings, they may seek further clarification, propose modifications to the offer, or even withdraw it. The goal is to ensure the buyer’s confidence in the business’s viability and accuracy of its representations.
- Differences Between Large and Small Businesses: The due diligence process varies significantly based on the size of the business. Large businesses, like Fortune 500 companies, usually have audited financials and a formalized due diligence process involving teams of accountants and lawyers. Small businesses, in contrast, often have simpler financial setups, sometimes managed directly by the owners or a bookkeeper, with a CPA involved only for tax purposes.
- Managing Buyer Inquiries in Small Businesses: Small businesses cannot feasibly accommodate extensive due diligence requests from numerous unqualified buyers. This is where a business advisor or broker becomes invaluable.
- Role of Business Advisors: Firms like Quorum Business Advisors, LLC, play a crucial role in qualifying potential buyers, ensuring that sellers engage only with serious candidates who have the necessary experience and financial resources. They facilitate the due diligence process, allowing the seller to focus on running the business.
Due diligence is a balancing act – starting with trust in the initial information provided and moving towards an exhaustive investigation to confirm the business’s integrity. For both buyers and sellers, understanding and effectively navigating this process is key to a successful transaction. Business advisors can significantly streamline this phase, ensuring a more efficient and satisfactory outcome for all parties involved.