Due diligence is a very interesting step in the process of selling and buying a business that follows the acceptance of an offer. At Transworld, our offers are always non-binding during the due diligence period. This means that the buyer or seller can walk away from the deal at any time for any reason. Following the due diligence period comes the signing of the Asset Purchase Agreement (APA) which is the contract that makes the deal binding for both parties.
To begin the due diligence period, the buyer is required to put a down payment into escrow. A typical down payment is 10% of the total sale price. With a non-binding, accepted offer, the down payment is fully refundable to the buyer should either party walk away from the deal. A due diligence period can range anywhere from one week up to one month, with 14 to 21 days being most typical.
One of the first steps during due diligence is a conversation with the landlord of the property. Most leases have an assignment clause that the seller can transfer their lease to a buyer with the approval of the landlord. Often times landlords are willing to draw up a new lease for the new business owner. If the new owner is using a Small Business Association (SBA) loan to purchase the business, the SBA will likely require a ten-year lease option agreement. Most SBA-backed loans are for a term of ten years, this requirement makes sense given the loan terms.
The next step in due diligence is a thorough vetting of the financials. The buyer will get access to income statements, profit and loss statements, balance sheets, bank statements, tax returns, credit card transactions and any other financial information available in regard to the business. The goal of the financial vetting for the buyer is to ensure the financials represented in the marketing materials were accurate. All banks and lending institutions involved in the transaction will also thoroughly review all financial records. In the case of a franchise business, due diligence also allows for the franchisor's approval of the new buyer.
The last piece of the puzzle involves the closing attorney and the Transworld broker. The pair will collaborate on developing the closing documents for both parties to review. The closing documents will include the Asset Purchase Agreement (APA), the Bill of Sale (which outlines the transfer of property and assets), a Promissory Note and the Uniform Commercial Code (UCC-1) filing (in the event of seller financing). The final documents produced will include the buyer and seller closing settlement statements.
To summarize the entire due diligence period - this is time for the buyer to vet a business before making their final decision to sign the purchase contract, while they have "skin in the game" (cash in escrow) to provide them with extra motivation to complete the process.
For more information on the Transworld process, visit our website at www.tworlddenver.com or schedule a consultation with one of our brokers.
Chris Cantwell brings 20 years of small business experience to Transworld via the restaurant industry. While Chris is diverse in working with all industries, restaurants, hospitality and franchises are his areas of added expertise. He is a member of the Colorado Restaurant Association keeping him up to date on the pulse of the industry.