Due Diligence
By: Richard Parker: President of The Business For Sale Buyer Resource Center and author of How To Buy A Good AUSTRALIAN Business At A Great Price ©
Due Diligence is the period when you will be able to access the company's books and records to verify that all of the information that you have been told thus far is true and accurate. Most often, people unwisely believe that Due diligence is simply the time to verify the financial position of the company.
While this is true to some extent, a proper and effective Due Diligence goes way past the financials. Sure, you want to be certain that what you have been told is true but realistically even if the numbers are exactly as they were presented to you, then what? All you would have is a confirmation of the past but absolutely no inclination of what the future may hold for the company or the industry.
The Right Approach To Due Diligence
Is this the time to look for things that are wrong with the business? Is this the time to strictly verify numbers? Is this the time to disprove what you have been told by the seller? While each of these approaches is somewhat valid none are absolute. Sure, you will want to employ a part of each of these strategies but an effective Due Diligence is when you can really "check things out".
Without question, your approach is to use this period to determine whether or not the future looks bright for the business and the industry. To do so, you must investigate far more than the financial aspect. Sure, the various financial statements will give you a picture of the past and perhaps a glimpse of the future but the past is over and done with. You must thoroughly review the company's sales, marketing, employees, contracts, customers, competition, systems, suppliers, and legal and corporate issues.
You want to complete the Due diligence period knowing exactly what you are getting into, what needs to be fixed, what the costs are to fix them and if you are the right person to be at the helm to put the plans in place to make a great future for the business. In other words, learn everything before you buy!
How Long Do You REALLY Need
Every seller and every broker working for the seller will try to negotiate the shortest Due Diligence period possible. I have heard situations where this was limited to a week or so. You must be aware that unless you have intimate knowledge of a particular business it is impossible and reckless to believe you can truly get a feel for a business in this short a time. The shorter the period the greater the number of surprises you will find out later. Moreover, the chances are that you will not be able to learn enough about the business so you will probably abort the purchase. Or, worse, you will buy the wrong business or negotiate terms and conditions that are highly unfavorable.
You need at least 30 days (20 working days) for even the smallest of companies. Since a proper investigation reaches farther than just financials you must allow yourself adequate time to accumulate the information. This strategy lends itself to wondering how to get the seller to agree to this time frame. It's actually quite easy; let the seller know exactly what it is that you will be investigating. Tell them that you do not want to back out of the deal and if they truly want to move forward with the purchase they must allow you the time to do the proper investigation.
Let them know that you want to buy the business but if they don't let you confirm your commitment through proper Due diligence then you will have to walk away before you start-when you position it this way, you'll get what you want!
Preparation
Your preparation must begin the moment you believe that the business may be worth pursuing. In fact, after you meet the owner the first time and believe that you may be interested you should begin to organize your plan. No matter how early you are in negotiations, at least start think of what it is that you need to do. Start lists and note areas and specific details related to the business that warrants further review.
Once you get closer to a deal keep detailed "to do" lists, broken down by each sector of the business (i.e. Financials, Employees, Sales, Contracts, etc.). Keep your accountant informed of when you anticipate beginning the Due Diligence. Assemble lists of the materials you will need from the company and never ever begin the Due Diligence until you have received all of the supporting documents that you will need from the seller.
Should You Hire An Accountant To Help You?
Absolutely and without question you should use an accountant for this exercise. Even if you are an expert in this area, get an accountant to run the numbers and verify all of the financial activity. There is so much more that has to be investigated that your time is best spent on these areas and hire a professional to help with the financials.
Getting The Seller and Their Staff To Cooperate
The seller must let his people know that they are to provide you with full access to all files and complete cooperation throughout your investigation. Don't let the seller "think" that you are snooping; let them know in the clearest of terms that you are snooping! That's your job. If there is anything that they do not want you to see, then tell them to remove it from the premises.
What If You Find Surprises?
This should probably be titled: "What to do "WHEN" you find surprises" because you will. If you don't, you haven't looked hard enough. Deal with each on it's own and make sure that you thoroughly investigate each so that your facts are bulletproof. However, don't get bogged down with minor issues and you are best to take these as "part of the package". Unless you find something that cannot be resolved or is so detrimental that even if the seller lowered the price by 50% you would still have to walk away you are best to take all of these obstacles in stride. Don't publicize them; investigate them. A few issues doesn't mean that the business is bad. You must weigh them impact against the future viability of the business. Remember your goal is to learn what it is you will be getting into and what the future can be with you in charge.
The option always exists for you to renegotiate once your investigation is completed. You will be in a much stronger position if you can go to the seller with very specific concerns, which require reevaluation and renegotiation. With this in mind, do not discuss your findings with anyone except your accountant or other advisors. Not the seller, not your broker, not the employees…nobody. It is not their business!
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