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Due Diligence

Due diligence is the buyer's right to research a business prior to the date of purchase. The time period for due diligence is specified in the letter of intent (typically 60 to 90 days) along with any other stipulations that have been added by mutual agreement.

Some of the due diligence procedures will require the buyer or the buyer's representatives to physically inspect the business' assets. However, most of the due diligence process involves paperwork, much of which can and should be prepared by the seller in advance.

At a minimum, the seller should be prepared to produce the following documentation and information:

Financial Data

Prospective buyers will undoubtedly want to know the financial condition of your business. The place they will turn for this information is your company's financial data, i.e. tax returns and financial statements that document the business' financial state. Meet with your tax preparer well in advance to make sure your financial information is up-to-date and accurate.

Asset Values

The buyer will also be interested in knowing how much the company's assets are worth. Chances are the buyer will do an independent evaluation of company assets such as real estate, equipment and inventories. However, he/she will rely on your records to track the historical value of those assets.

Corporate Documents & Licenses

Your company has a wealth of legal documentation that the buyer needs to review prior to closing. These documents include your corporate charter and bylaws, meeting minutes, licenses and permits. Even if you're not selling your business, it's a good idea to know where these documents are. If you haven't done so already, collect these documents in a central, fireproof location that can be easily accessed.

Employment Agreements

In most cases, the buyer is going to inherit most of your current employees. A new owner may choose to negotiate new agreements with the employees or leave the current ones in effect. In either case, he/she will most likely want to see the current employment agreements to determine where things stand and to understand the HR dynamics of the business. At the very least, prepare an organizational chart to help the buyer become acquainted with your employees and their roles in the company.

Litigation Documents and Pending Legal Actions

Prior legal proceedings should be fair game in the due diligence process. Remember: The buyer is not just buying the company as it exists today. He/she is also purchasing the business' history, reputation and (in some cases) liabilities. Be prepared to provide the buyer with the necessary documents related to prior legal proceedings against your business as well as information about any legal action that is currently pending.

The goal in due diligence is to provide the buyer with the information required to assess the risk of purchasing the business. Withholding negative information from the buyer violates the spirit of due diligence and could potentially leave the seller legally vulnerable. Consult with your attorney to determine any other information you need to provide.