When a business owner accepts a buyer’s letter of intent (LOI) to acquire their business, the buyer gets the opportunity to perform due diligence as outlined in that LOI. The offer to purchase a business is contingent on the successful completion of the due diligence period. Due diligence is meant to open the paths of communication between the buyer and seller to discuss the business on a granular level so the buyer can truly understand the reality of the business acquisition. Generally all topics are on the table with the exception of speaking directly with customers or employees (because of confidentiality considerations).
Using the due diligence period to validate the information the business owner has provided about their business is one of the many key aspects of using due diligence effectively. The buyer will have access to the financial documentation of the business including credit card statements, balance sheets, and tax documents. Due diligence is also when the buyer can take a deep dive into the business’s contracts with vendors, suppliers, and customers which can help them identify any concerning areas of concentration or opportunities for growth.
The buyer can also learn more about the operating structure of the business from the organizational structure and leadership roles to their strategic marketing plan and market research projects. During due diligence the buyer and seller will be able to get to know each other much better and will quickly be able to see if the buyer will be a culture fit for the business as well, which is a very important aspect of a laying the groundwork for a successful business acquisition.
At the end of the day using the due diligence period effectively (and exhaustively) is the best tool a buyer has to make sure they are buying a business that is right for them, suits their business ownership goals, and skill set. Ultimately, if issues arise during due diligence the buyer can decline their LOI, receive their escrow deposit back, and move on. But if due diligence goes according to plan they can officially accept the LOI offer and sign the asset purchase agreement (closing documents) to purchase the business.
To learn more about the process of buying a business or selling a business, we invite you to visit our website.