The Importance of Due Diligence When Buying or Selling a Business - VR Business Sales Blog

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Thursday, April 9, 2009

The Importance of Due Diligence When Buying or Selling a Business

JoAnn Lombardi
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There is no such thing as a short cut when approaching due diligence. As time consuming and cumbersome as the process may be, it is not to be taken lightly. The examination has to be comprehensive and thorough for both the buyer and the seller.
Particularly for the buyer, a less than thorough review could result in costly surprises upon acquiring the business. A misstep in the seller’s research could end in losing the deal or another kind of adjustment. Regardless of the side that you’re on, due diligence has to be followed to the slightest detail if you want to engage in a successful transaction.
On the buyer’s end, due diligence will involve identifying legal issues that need to be addressed and evaluate the merits of the potential transaction. Often, the information that’s discovered while examining will alter the structure of the deal as well as the pricing in some scenarios.
For example, if the seller has a significant number of contracts that cannot be assigned without third party consents, the buyer may elect to pursue a stock purchase or merger transaction in order to avoid the requirement. When real estate is involved, the buyer will also want to conduct an environmental review, since environmental laws require property owners to inform the regulatory authorities of any contamination that’s discovered on the property. Therefore, both the buyer and the seller will have to carefully negotiate how the review will be conducted.
Here’s another case to consider when conducting due diligence: How strong is the accounts receivable of the seller? This should be an early priority in the due diligence process. You should ask yourself if the collection time is lengthening with accounts receivable. Does the seller have high credit limits or easy terms or discounts? What part of accounts receivable is realistically uncollectible? How well does the company keep track of its receivables such as through documentation? Are there outstanding and overdue balances from customers through the cracks? After asking these questions, you may realize that the company is a basket case and should be avoided. On the other end, it can be ammunition in getting a better price.  
So remember, performing due diligence thoroughly and comprehensively will only help you as you move closer to buying or the selling a business.


Response to: The Importance of Due Diligence When Buying or Selling a Business
Andrew Fargas says
I never thought of some of points mentioned until I read this blog. How deep do I have to go to investigate a business that I am looking to buy? Would I need to hire an consultant to help?

Response to: The Importance of Due Diligence When Buying or Selling a Business
Elliott Sandalie says
Are there any books that I can read to gain a better grasp on due dilligence? I own a business in Portland, and maybe looking to sell. What should I focus on first?

Response to: The Importance of Due Diligence When Buying or Selling a Business
Hazel Farmer says
I own property behind the business that I own, but I may run into probelms with the environmental review because of the bog that's back there. Do I have to include the property in my sale of the business?

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