The dictionary definition of due diligence is “research and analysis of a company or organization done in preparation for a business transaction.”
Basically, a buyer will conduct due diligence before the Purchase Agreement is signed to make sure they are buying what they thought they are buying. This goes beyond just reviewing documents and contracts.
With so much is at stake for the buyer in a M&A transaction, they will want to have all the facts and information available before making a final decision and going ahead.
In the due diligence process, the seller will receive a long list of questions and document requests. Be ready for this, and don’t complain. It is standard.
The list of documents requested will be comprehensive and cover many different areas. Among these are :
- Tax (IRS) records and filings
- Legal structure and incorporation documents
- Management Agreements
- Insurance information
- Organizational structure
- Operations information
- Marketing and sales materials
- Human resources and personnel policies
- Detailed financial information
- Copies of contracts, licenses and agreements with vendors and customers
- Potential and current legal issues and liabilities
And so on. I think you get the idea.
Buyers are focusing on due diligence now more than ever. Of course, the financial information is critical. But other items relating to the business will be considered too.
In preparation of this process the best team possible to work with the buyer (buyers should do the same).
As a seller, you should anticipate all these questions and have the materials assembled and prepared beforehand to ensure the process goes smoothly.
Despite the seller’s best efforts to prepare ahead of time, anticipate that the due diligence process will take time. Be patient with the potential buyer’s requests.
