The due diligence phase of a transaction can haunt the seller of a business in many ways. I wrote about this earlier, but it never hurts repeating.
The best way to avoid problems during due diligence is to reveal all of the company’s problems right away. As soon as possible.
Of course, the seller should have good explanations as to why the issue is not a big deal or a problem. Why it can be managed. But especially don’t let the buyer find out on their own.
Not all due diligence issues are financial (though that is very important). Some other items include:
Precise definitions as to what is and is not for sale. Is real estate included? How about furniture and fixtures? Are they in good condition?
What is proprietary and protected? Are there good, solid patents and IP protection on important intangibles?
Is the competitive advantage sustainable? Does the company even have one? What is the advantage? Better marketing? More cost-effective manufacturing? Is the competitive advantage dependent on any key individuals?
Employment agreements and non-competes? I talked about this in an earlier post but it is worth repeating.
What are working capital requirements? (OK, this is financial). Are any major capital expenditures required soon?
Another financial due diligence issue: what is the quality and integrity of the financial information? Can the financial statements be trusted?
What is management depth? Is the business dependent on one or two key people (usually the owners)? If yes, that is a big negative.
These are just examples, there are other items. The seller needs to anticipate any questions from the buyer prior to the commencement of due diligence. Everything should be in order ahead of time, to make the process go smoothly.
