So you’re one of the lucky ones. You business has survived the worst of the recession, but now you want out. The last couple years, well, sure you made a profit, but just barely, and darn! it was hard!
The good news is you have a potential buyer, who seemed ready and willing to sign on the dotted line, that is, until his lawyer put that to a screeching halt with worried cries of “due diligence!”
What is due diligence? In a nutshell, due diligence is making sure the i’s are dotted and the t’s are crossed. Due diligence research will bring up outstanding issues that would prevent a clean sale from one’s hands to the other.
For instance, if you own a piece of equipment, but secured the loan to pay for the equipment with that piece of equipment, then the bank will have security in the equipment. Said simply, if you got a forklift with a secured loan from the bank, the bank would take the forklift back if you stopped making payments. A potential buyer will want to know that the equipment is not paid for, and would also want to know if there are additional entitities who hold security interests. Depending upon what is owned and what is owed, the asking price for otherwise apparently similar businesses might vary widely.
Due diligence might also bring up problems with ownership of the company—imagine a man trying to sell a business, or even his half of the business out from under his wife because he plans on divorcing her in the near future. Perhaps the couple is in the middle of divorce already. Even if he was trying to sell only his half of the business, would the buyer want to take on that can of worms unknowingly? Eh, probably not.
So due diligence protects a buyer, and also may favor a buyer in the event the sale goes through. For example, if the buyer wants the company but discovers a flaw in the business, the buyer may ask for a reduction in price. In our unhappy couple scenario, perhaps the wife decides, yeah, she’s OK with her husband selling his half, but she’s not letting her half go. In that case, the buyer might ask for a reduction to reflect that he is purchasing only a half business, and an extra reduction to reflect a lower value to him due to having to be in business with the wife.
Due diligence research also will examine tax returns, employee handbooks, agreements, assets, work processes, valuations and P&L statements. If your books are not in order, then the buyer may refuse the sale, or may ask for further reduction in sales price.
The lesson here is, get your business in order before you put it up for sale. Just like you would repair your house and make it attractive for buyers prior to putting it on the market, so should you with your business. Your lawyer and accountant can help with that.
Posted by debmcnichol 
