The Deal is Almost Done – or Is It?

Selling/buying a business consists of numerous steps, so it may seem that signing the Letter of Intent resembles going into the last lap of a long distance race. However, the seller should postpone their celebration a little longer, because the next step of the process is due diligence. It is in this stage when buyers really make their decisions about the deal. The information they are about to discover can steer the deal in any direction, whether it is adjusting the price, going ahead or even withdrawing from the deal.

Importance of this step should not be underestimated by either side. Quite conversely, mutual understanding of what is going to take place in the due diligence is going to be very important at this stage. In essence, due diligence is defined as: “the basic function of due diligence is to assess the benefits and liabilities of a proposed acquisition by inquiring into all relevant aspects of the past, present, and predictable future of the business to be purchased.”

Due diligence is preceded by rigorous preparation – buyers assemble teams to help them with the diligence (contains accountants, lawyers, appraisers, marketing personnel, etc.) while sellers do their homework by making sure that all important aspects of the business are up to par.

The areas of thorough investigations are:

  • Industry structure
  • Human resources
  • Marketing
  • Operations
  • Balance sheet
  • Environmental issues
  • Manufacturing
  • Trademarks, patents & copyrights

Due diligence can determine whether the buyer goes through with the deal or begins a new round of negotiations. By completing the due diligence process, the buyer process insures, as far as possible, that the buyer is getting what he or she bargained for. The executed Letter of Intent is, in many ways, just the beginning.