One of the most important components of your negotiation happens after a letter of intent has been signed, allowing the buyer to do a deep dive into the company.
The due diligence period kicks off right after the Letter of Intent (LOI) is signed. The LOI lays out the main terms of the deal, like the purchase price, financing, and the timeline for closing.
But the deal isn’t set in stone until due diligence wraps up and both sides are happy with what they find. During this time, the buyer has the option to back out or renegotiate the terms based on what they discover.
You may have been looking for terms like “due diligence period definition” and “due diligence period meaning” or have questions such as “What is a due diligence period?”
An integral part of M&A dealings is the due diligence process. It’s when the potential buyer dives into all the information the seller has provided, scrutinizing every detail. This is their chance to spot any discrepancies or ask about anything that might have been misunderstood, whether by oversight or design or misrepresented either intentionally or by accident.
The information shared during the diligence period should be enough to encourage the buyer of the business to take the forward action step in purchasing it.
Buyers go through the due diligence period for a couple of different reasons. First of all, they want to verify that everything that was represented in the sales perspective was indeed accurate and to identify whether or not any other potential issues or problems have been disclosed that would block them from going through with the sale.
Most buyers want to see as much as they can during the due diligence period, and unless you have some really good reason to block something, there is a solid chance you will need to provide as much information as possible.
A buyer who does a good job on the diligence process will request to see bank statements, vendor agreements, multiple years of accounting statements, tax returns, and more. The buyer will likely come to your business site if you have a physical location to do extensive research on the structure of your current operation as well.
The period of due diligence is flexible as long as both parties are in agreement. What is due diligence period? Typically, for small to mid-sized businesses, the time frame spans 30 to 60 days.
Here’s what influences the duration:
If you’ve been looking up “how long due diligence period” or asking questions like “How long is a due diligence period?” and “How long is the due diligence period?” The information above should give you a clear idea.
A prospective business partner should dive into the company’s latest financials, including accounts, annual returns, and reports.
It’s equally crucial to examine assets, liabilities, and long-term debt.
Typically, financial due diligence falls into the hands of the buyer’s accountant or solicitor during pre-contract checks. They’ll comb through every financial detail and identify potential risks, liabilities, and the overall financial health of the business. These insights will help the buyer make an informed decision during the due diligence period.
When it comes to legal due diligence, think of it as giving the company’s legal standing a thorough once-over. This typically means digging into corporate filings, contracts, and other legal documents to spot any potential legal speed bumps.
Why is this step so important? It helps investors or buyers gauge whether the business can keep cruising smoothly after the acquisition.
Accuracy in the annual report is non-negotiable—any errors could land directors in legal hot water. This holds true not just for financial details but for all information presented. Since the annual report is out in the public domain, it’s under the legal microscope. Any inaccuracies or misleading statements could trigger legal action against the company’s leaders.
Operational details should also be checked as they provide a clear view of how the company is run and how it continues its business. It looks into the efficiency of operations and the productivity of the employees and how these aspects reflect in customer satisfaction levels. Property inspections may also be included.
Operational insights can unearth potential risks and liabilities. By grasping how all the pieces fit together, companies can better safeguard themselves against legal challenges.
There is a lot you can do through the diligence process to make the buyer feel at ease. Any misrepresentation can be especially problematic from the perspective of the business seller because it can make the buyer feel as though you have been dishonest. You can expedite the process of due diligence in a big way by ensuring that you have as much information as possible on day one of the diligence period. It shows preparation and honesty and makes it easier for the buyer to carry out their entire process.
When closing an M&A deal, numerous documents will demand attention from the buyer and seller beyond the purchase agreement. When you sign a contract, you might encounter disclosure schedules, authorizations, contract and intellectual property assignments, a bill of sale or stock transfer documents, various agreements (including transition, consulting, employment, and restrictive agreements), promissory notes, security agreements, a closing statement, lease agreements, and escrow agreements.
To ensure a smooth close, build trust with the buyer, as this is essential for the deal’s success. Continue running your business normally, consult the buyer before making significant changes, and be ready for surprises.
Keep the interim period short to avoid deal-killers, and postpone any buyer training until after the closing unless advised otherwise by your attorney. Using an escrow firm can help manage details and avoid complications. Additionally, perform a dry run with your M&A advisor to catch potential issues early, keep the closing date flexible, and manage emotions to handle stress effectively.
Collaborating with industry experts, solicitors, and accountants can greatly enhance the due diligence process and help achieve a purchase price that’s fair for both parties. These professionals possess the necessary experience and expertise to thoroughly investigate complex areas. They’re also adept at spotting risks and opportunities that may be missed by those lacking specialized knowledge.
If you are thinking about selling your company and need assistance from an experienced and trusted business broker, the team at Website Closers leverages their years of experience selling businesses of all types to help connect you with the right buyer.
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