Congratulations! Your offer to buy a business has been accepted. But how can you be sure the information provided by the seller is accurate? Due Diligence is the answer to your question.
Following the acceptance of the buyer's offer (or letter of intent) by the seller is the Due Diligence period. Every offer made through Transworld includes a contingency for a satisfactory due diligence period. This period is an opportunity for the buyer to take a deeper look into the specifics of the business they have an interest in buying.
During Due Diligence, the buyer gets an opportunity to verify that the information provided by the seller is true and accurate. The buyer will be given full access to the documents and records that will support the financial and operational claims made by the seller. The buyer will be able to examine any and every asset of the business that is to be included in the sale. Some good Due Diligence questions to keep in mind, as the potential buyer, are as follows:
Question: How do I know that the sales volume presented by the seller is accurate?
Answer: The buyer will be granted access to the company's bank statements to verify that the deposits are in line with the sales reported.
Question: How do I know that the earnings claimed are accurate?
Answer: A great way to confirm earning information is to look at the company's tax returns to see that the sales and profits reported in the company's P&L statements are in line with what they reported to the IRS. As an additional check, a retail-based business will also have state sales tax returns that should match with the sales volume presented to the buyer.
Question: What about the lease terms?
Answer: The buyer will have the opportunity to examine the current lease documents. Also, the buyer's offer should have been made with a stated contingency that they will either be able to assume the current lease or negotiate a new lease with satisfactory terms.
Question: What furnishings, fixtures, and equipment will be included in the sale and what is their current condition?
Answer: The offer should specify that all items currently used in the operation of the business are included among the assets they are purchasing. Any exceptions should have been noted prior to the seller's acceptance of the offer. If there are items that the seller wishes to exclude from the deal, the due diligence period is the time to make a specific list of excluded items and develop a written agreement between parties detailing those exclusions.
Once the Due Diligence period is completed to the satisfaction of the buyer, the buyer then has three options for proceeding:
- Accept the deal as originally offered and move forward to the contract stage and business purchase.
- Cancel the offer and receive a refund for their provided deposit.
- Re-open negotiations due to information uncovered during the due diligence period.
Throughout the due diligence process, your Transworld broker will be a valuable resource. They will ensure that you are given enough information to make an informed decision about purchasing the business in question. Our brokers can also provide knowledgeable insight into the re-negotiation process should that be necessary to complete a business transaction.
If you would like additional information concerning the business purchase process please visit our website at www.tworlddenver.com or schedule a consultation with one of our brokers now!
Ross Haymes is a Business Broker at Transworld. He draws on his decades of experience in corporate finance and entrepreneurship to guide buyers and sellers toward their goals. During his 20-year career with NYSE-listed Burlington Industries, Ross served as an economist before becoming Investor Relations Director. Upon retirement, Ross realized his own dream of becoming a small business owner. In his role at Transworld, he works directly with business owners to orchestrate, step-by-step, the buying, selling, and growth of their companies.