Articles Tagged ‘Due Diligence’

Due Diligence

Saturday, November 10th, 2012

No experienced buyer purchases a company without first learning everything there is to know about it. That learning process is known as “due diligence.”

During due diligence, a buyer, its accountant(s), lawyer(s) and any other professional advisor it employs will examine every aspect of every one of the seller’s contracts, procedures, relationships, plans, agreements, systems, leases, manuals and financial documents.

This process requires an extraordinary amount of time and attention on both the buyer’s and the seller’s parts. That’s why we recommend that owners initiate the due diligence process as soon as they decide to sell their companies and have an indication from a transaction intermediary that the business is salable for sufficient money to meet their financial security wishes and needs.

Starting the due diligence process well before the buyer requests documents gives sellers the opportunity to remove any obstacle that might prevent a buyer from traveling a straight path to closing. Keeping the road to closing free from unnecessary impediments compresses the time between the buyer’s offer and the closing. In a sales transaction, time rarely favors the seller so owners want to condense the process.

Buyers are looking for the skeletons in your closet and are very skilled at finding them. They are looking for malfeasance or undisclosed material risks. They will look for fraud (on the part of an owner or manager) or any misrepresentations you have made such as improperly recognized revenues or expenses, and any information you have omitted, such as: unpaid taxes, pending or threatened litigation or obsolescent business equipment, processes, products or services.

The buyer is also looking for information that would affect the value of the company and the advisability of purchasing it. Up to the moment due diligence begins, you have controlled the information flowing to the buyer. You give up much of that control during the buyer’s due diligence.

Finally, if the buyer’s search for malfeasance, misrepresentations or information that would affect the company’s value yields no results, the hunt is on for anything that the buyer could use to lower the price or improve its terms. And that ulterior motive—lowering price and improving the buyer’s terms—permeates the entire due diligence process. Is it any wonder that sellers hate (and that is not too strong a word) this process?

And, is it any wonder that we strongly suggest (as we do) that you and your advisors clean up every contract, agreement, stock book, record of corporate actions, manual, lease, or threatened law suit BEFORE you take your company to market?

Disclosure:
The information contained in this article is general in nature and is not legal, tax or financial advice. For information regarding your particular situation, contact an attorney or a tax or financial advisor.

The information in this newsletter is provided with the understanding that it does not render legal, accounting, tax or financial advice. In specific cases, clients should consult their legal, accounting, tax or financial advisor. This article is not intended to give advice or to represent our firm as being qualified to give advice in all areas of professional services. Exit Planning is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice that you need.

This is an opt-in newsletter published by Business Enterprise Institute, Inc., and presented to you by our firm. We appreciate your interest.

Any examples provided are hypothetical and for illustrative purposes only. Examples include fictitious names and do not represent any particular person or entity.

Securities, investment advisory and financial planning services offered through MML Investors Services, LLC 317-469-9999 Member SIPC Supervisory offices: 900 E. 96th St, Ste 300, Indianapolis, IN 46240. The Family Business Legacy Company, LLC is not an affiliate or subsidiary of MML Investors Services, LLC.

Copyright © 2016 Business Enterprise Institute, Inc., All rights reserved.

T. Ray Phillips, CFBS, AEP, ChFC
trphillips@financialguide.com

The Family Business Legacy Co, LLC
900 E 96th Street
Suite 300
Indianapolis, IN 46240
http://www.familybusinesslegacies.com
317-208-6312

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