BUYERS - Commonly Requested Items During The Due Diligence Process

When buying a business, it’s imperative that you do your own due diligence. The due diligence process is typically completed AFTER an offer is made and accepted by the seller. Overall, the due diligence process is the timed review of documents and other data on the business prior to completing a business purchase. Most sellers offer one to three weeks for the typical review timeline.

Many questions will be answered in the CBP marketing document you receive upon signing an NDA.  You will also fill out a “New Buyer Packet” for the Business Broker.

Confidentiality is imperative. It is vital to keep all the business information confidential and to refrain from contacting any employees, vendors, or customers of the business. Not only do you risk affecting the business operations, but it could invalidate the transaction and potentially encourage legal action.

When putting together your Due Diligence Request List, consider the categories below. These are commonly requested items in the due diligence process. It’s important to provide YOUR list as quickly as possible to the Business Broker. The Business Broker will relay all requests and facilitate the due diligence review. Always communicate through the Business Broker.

Common Due Diligence Items:

1.     General Business Information

  • Organizational documents to show the ownership structure.

  • Employee tenure and pay. Please note that most business owners won’t give their names. Instead, they will say “Employee 1 has been with us for X years and earns Y per hour.”

  • Business operations or the company handbook

  • Anything the business has in place for operations such as a payroll vendor, merchant services, accounting, or insurance services. Tackle these items early to ensure a smooth transition.

2.     More Detailed Business Information

  • Supporting financial documents such as AR/AP reports, sales by customer, and sales by vendor

  • Equipment list and asset list

  • Policies - Workers Compensation, Health, Life, General Liability, Property, etc.

  • A list of all licenses, permits or governmental consents needed to run the business.

 3. The Most Sensitive Business Information

  • Last three years of Profit and Loss Statements and Balance Sheets

  • Last three years of Tax Returns

  • SDE Worksheet provided by the Business Broker

  • Contracts with vendors, suppliers, or customers

  • Clearances from State Board of Equalization, Employment Development Department and Franchise Tax Board, along with a UCC Search

*This is not a comprehensive list. Please add other items you deem necessary to finalizing the purchase of the business.

Other Important Items When Buying a Business:

Money down - Want your offer to stand out? Put a deposit with your offer. It’s common for these funds to become non-refundable (to you) once the due diligence process is finished, without written notice, unless you terminate the transaction per the failure of a contingency in your offer, within the timeframe allotted. Alternatively, if you close on the transaction. The deposit can be applied to your down payment.

Landlords - Once you are satisfied with the major pieces of due diligence, then the Business Broker will coordinate your contact with the landlord. There is no upside to contacting the landlord until you are comfortable with the financials and any other sensitive due diligence items. Be prepared to give the Landlord your financials and a statement of your qualifications.

Your personal advisors - Please make sure you consult with the right type of advisors to assist you in your transaction. It is vital to engage transaction-oriented advisors. Choose professionals who specialize in helping people buy and sell businesses, NOT Real Estate. Your Business Broker can assist in identifying advisors appropriate for the type and size of the transaction.

Final thoughts on due diligence:

  • There is no perfect business. If there were, there would likely be no upside or improvement opportunity.

  • Get requests in fast and early. After you review the information, proactively check off contingencies with the seller. This builds trust and shows progress.

  • Ask the Business Broker how they put together the SDE Worksheet. The Business Broker will answer any questions you may have.

Ainsley Shea