Due Diligence – What exactly does that mean?
A buyer finds the ideal business and makes an offer. After negotiations have been settled the Purchase Agreement has been signed by both parties – the buying party and the selling party. Now what?
The Purchase Agreement or Offer to Purchase will have a clause in the agreement that allows a stated amount of time for the Buyer to really dig into the business paperwork and make sure every that was presented by the seller is accurate and true. Due diligence will vary depending on the business and its complexity. Some of the more basic areas of this process include:
Books, records, financials approved to your satisfaction
All equipment – working condition
Assignment of a lease
The business being sold is free and clear of debt and leins
Ability to get necessary licenses and permit
Ability to get buyer financing
While reviewing these areas of the the business if the buyer should find any surprises or negative aspects of the business that was not disclosed prior, the buyer has two options 1.) renegotiate the deal to compensate for the discovery or 2.) exercise their right to back out of the deal and get their full deposit refunded. Most Purchase Agreements are written so that the buyer can back out of the deal for any reason.
The Purchase Agreement is a good faith commitment by Buyer and Seller that state their intentions. Due diligence is that time period that gives the buyer the opportunity to inspect the business carefully and back out of the deal if something negative is found.