9. Due Diligence
The due diligence period is the time period after making a conditional offer and before the offer becomes firm. During this time, buyers inquire as mush information as they can get to make sure that the picture that was painted to them by the seller/broker is close to the real picture of the business. The buyer inquires all types of documentation and information about the business such as:
- Complete financial statements (audited statements if available)
- Tax fillings
- Customer list
- Lease agreement
- Insurance agreements
- Franchise agreement (if the business is franchised)
When financial statements do not reflect the reality of the business, it is common that the buyers spend a period of time observing the day to day activity of the business. A condition is generally included in the offer stating that the buyer has to satisfy him/herself at his/her own discretion with the sales activity and level of profits by staying physically in the business and controlling income and costs.
10. Removing Conditions
After spending some time in the business, inspecting the provided documentation and analyzing the answers provided in response to the variety of questions, the buyer makes a decision about purchasing the business. The buyer has three possibilities :
- Proceed with the deal and remove all conditions. The deal becomes firm and the money changes hands in time of closing.
- Refuse the deal. The buyer gets back his/her deposit after a mutual release is signed between the buyer and the seller.
- Renegotiate the deal. In some cases the buyer and seller recognize that some information, revealed only in the due diligence period, have a serious impact on the business value, and as a consequence, the buyer and seller agree on different terms and conditions for the deal.
12. Transition period
The transition period is very important in preserving the value of the business, which is often neglected in negotiations. Most small business transactions have an important value assigned to goodwill, which is the intangible value derived from the different relationships developed by the seller over time with customers, suppliers, employees and the knowledge/knowhow residing in the company that directly impacts the way they do business and make profits. The transition period helps buyers familiarize themselves with the operationsof the business, build new relationships with customers, suppliers and employees and keep the business as profitable as it was before.
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