Why It’s Necessary

Is Due Diligence Really Necessary?
Due diligence is absolutely essential. No one should look at buying a business or signing any type of agreement to purchase something until full due diligence has been completed. If the seller of the business is serious about selling, he/she will take the time and help make sure that due diligence is carried out efficiently.

The seller will make sure that all assistance is given to the potential buyer so they can arrive at a decision to complete the purchase.If a business owner is evasive or uncooperative, this can show they have something to hide. In any event, if they are not cooperative there is no point continuing the due diligence. It would probably be advisable to move on and buy another business.

Can be Painful for Owners of Businesses
The owner of a business can find due diligence very difficult and painful. It can be difficult because the other party is trying to prove that there are no problems with what you are offering. They may keep coming back to you with more and more questions and you may come to a stage where you find yourself at the “end of your tether”.

You may even start questioning their approaches and it is easy to become upset with their insinuations. However, you need to put yourself in their position. They may be spending a lot of money to purchase something you have. You cannot begrudge them investigating, and asking the types of questions you would yourself, if the shoe was on the other foot.

If you are the owner of the business, the time to start thinking about due diligence is now. Every decision you make, and everything you write down in your proposal should be tested against how it will look if someone else comes along and asks the hard questions.

Every business will have to go through a certain amount of due diligence so if you are looking at a future sale, put everything in place so that that process will go through without any problems – when the time comes.

What about Due Diligence by the Seller?
As the seller of the business, you may want to do due diligence on the potential buyer.

Some of the reasons why you should do this will include the following:

  • Do they have the money to complete this transaction?
  • If they are paying with shares, what is the value of the shares?
  • How are they going to treat the staff?
  • If I leave money in the business, will they run the business to the ground?
  • Will buying my business stretch them in terms of available capital to the point that it will reduce their chances of success?
  • Do they have a good track record in dealings with other businesses?
  • Will they look after and treat my current customers well?
  • Will they be proud to be associated with this company?
  • If they are retaining the same business name, will it be detrimental to me if they fail?

Always do some of your own investigating. You will need to find out the buyer’s credit record, management experience, reputation and their plans for your company’s future operation.

You may have to leave due to illness, or you may want to retire, or simply want to cash it in after all your hard work. Consider how it will affect other people currently involved in the business. You may not want to sell to a particular buyer because you feel they will not look after customers or staff, or they may damage your business and the amount due to you might be put in jeopardy.

If issues regarding staff and customers etc are not a consideration, you may be happy just to collect your cash at the close, walk away and never look back. Maybe you aren’t concerned about whether the buyer will operate the business successfully.

The other point to consider is that if the buyer fails miserably there is a strong likelihood that they will be looking around for a scapegoat. They may try and dig up something and sue you for false misrepresentation. There are many things to consider when selling and it is important to realise that due diligence does not concern the buyer only, but it concerns you, as the owner of the business, as well.