What is due diligence? Why does a buyer need to perform due diligence? What information, records, and/or financial materials will the buyer want to access? How long will due diligence take? As a business owner preparing to sell my business, when should I start preparing for due diligence? Above are common questions sellers ask, never having sold a business before and wondering what the importance of due diligence is, and why they have to provide a buyer with all the detailed and sensitive information buyers and their accountants ask for.
If you are working with a professional Business Broker in Orange County they will guide you through the process and advise you on how to prepare. Your CPA will be a key advisor in Due Diligence and you should involve them early in the process so they are prepared when an offer is made.
What is due diligence?
Due Diligence is the review by the buyer and/or their CPA, after an offer has been accepted, of your business’s financial statements, employee, vendor, customer (names redacted if needed) records, insurance policies, business licenses, and material contracts generally for the last three years.
Why does a buyer need to perform due diligence?
The buyer has based their offer on the information provided and needs to confirm that what was represented to them is true and correct. Due Diligence is normally a contingency in the Purchase Agreement and If there are any inconsistencies the buyer can choose to renegotiate or cancel the Purchase Agreement.
What information, records, and/or financial materials will the buyer want to access?
Below is an example Due Diligence List of information that buyers and/or their CPAs might request. The list can vary according to industry and size. These are common items that will need to be gathered and readily available when an offer is made. For simplicity and convenience, most items can be added to a Dropbox file that your Business Broker sets up to help keep track and facilitate the Due Diligence process.
- Bank Statements – Last three years including any year to date bank statements.
- Corporate Tax Returns – Last three years.
- P&Ls – Last three years plus Year to Date P&L.
- Balance Sheet – Last year-end balance sheet (included in the offer) plus year to date balance sheet.
- A/R aging summary
- A/P aging summary
- Add backs – review of Seller benefits and expense add-backs. Can be accomplished at the Seller’s office in person with the Seller providing the details or through buyer’s view-only access to QuickBooks file or other accounting software.
- List of Employees (review of files will have to be onsite due to privacy of employee info).
- Review of Contracts (typically onsite since too many to scan and upload).
- List of Vendors.
- Equipment list (included in offer).
- Review & Inspect Equipment: Buyer and Seller review the equipment
- Customers List with annual sales last 3 years (in some cases customer names may be redacted).
- Review of Customer and Vendor Invoices – Review these on-site.
- W2s and 1099s for employees. (redact private information)
- Review Seller Disclosure Statement with Seller and Buyer
- Business License(s)
- Copy of insurance policies, Workman’s comp rates. Note: Buyer will need Loss Runs from Workman’s comp carrier so the buyer can get quotes.
- Office-premise leases.
- Corporate Documents: Articles of Incorporation, By-Laws, Minutes, Shareholder Certificates, Stock Ledger (if a stock sale)
Note: The Buyer’s CPA may wish to request additional information
How long will due diligence take?
The length of time it takes to perform Due Diligence will depend on the size, industry, and complexity of the business operations. Generally, the buyer is given 3 days to prepare a Due Diligence list, the seller has 5 days to gather the materials and the review of the materials typically takes two weeks to complete after receipt of the information. On larger, more complex transactions the review of the material can take up to a month including an attorney’s review on the buyer’s behalf.
As a seller of my business when should I start preparing for due diligence?
When you list the business you will be asked for some of the information needed for Due Diligence in addition to the amount for Owner’s Add Backs. When starting the listing process it is a good practice to separate your receipts and details for personal and owner’s expenses so they will be readily accessible when an offer is made and accepted.
If you have any questions during the Due Diligence process Pacific Business Sales, as the best business broker to sell will assist you every step of the way and keep you informed to help you navigate due diligence and the entire process for the sale of your business for a smooth and successful outcome. That is why it is important to pick the right Business Broker to sell your business and help you with this process.
