Chapter 4: The Due-diligence Period Before you enter the process of due diligence, you will be at a point where you will have looked at operations, facilities and financial statements of the business. This is what will have built your interest as it meets much of the criteria for the business you are looking for. When you show interest in a business that you are considering to buy, the owner will give you all sorts of information about the business. Many of them will be accurate and honest in their claims but it is essential that you investigate to confirm what has been told. This is not a matter of not trusting the seller; it is to verify that any given information is true.
Due diligence forms part of researching the business and is a time which is taken to carry out the investigation outlined above. This is also the time where you should involve professional assistance if you have not already done so.
It is not just a case of going through the accounts to confirm financial statistics that the seller has quoted: this will be included, but this information is all in the past. It would further require investigation of competition, customers, employees, suppliers, marketing and legal issues: anything that you would need to confirm that cannot be physically seen and verified by just observing/visiting areas of the business.
The researched information would then provide you with a more realistic insight into the future performance of the business. It will further give you an estimate of the amount of finance that you need to invest to bring the business to speed (it may be minimal if the business is proved to be as successful as reported).
4a) How Long and at What Cost?
Due diligence is a period when you will need to interact with the business to investigate much of the required information. Consequently, the owner and/or business broker will issue a charge to carry out this investigation. The owner may also try to negotiate this period to the shortest time possible. Although this period is negotiable, it can be as little as one week.
It is suggested for a small business that you try and have a period of at least three weeks for due diligence. Any less, you could miss out on vital information that could create the mistake of you buying the wrong business. The owner may feel uncomfortable about giving this period so you have to be strong in negotiating.
Let them know what you are investigating (to be fair) and that without the necessary time you need, you will lose all interest: it's only a tip but it will help.
You may also try to settle an agreement for the owner to take their business off the market during the period of due diligence. This will stop competition form other parties who may develop an interest in the business during this time. You have to respect that the owner will ask for a down payment (possibly a small deposit) if they agree to do so.
Ask the owner to provide you with all the documents and resources that you need to carry out the investigation: don't begin otherwise. It is also important that you are given full and honest co-operation from everyone in the business. It will be your job to use these people to provide you with any further information that you need. For some issues, you may need to contact external services to provide you with information and statistics relevant to the matter (banks, landlords, lenders, lessors, tax office, etc).
4b) Negative Findings
When you investigate, you will more than likely come across something that the owner was hoping you would not. If the issue is only minor, it may have a simple solution and therefore be overlooked. You may find something that does not have a solution: in which case, you should investigate the issue further as it may be the keystone to business failure.
Whatever you find, keep it to yourself and anyone that is involved with the investigation (your accountant, solicitor, broker, etc). This can then be presented to the owner after your investigation is complete which can be used to negotiate a more reasonable price.
As said in the introduction, it is easier to split your research into different areas of the business. The rest of the article will list how to split the research and detail what to look out for. It will also give an insight into those things that may add to a business' value. Article Index |
