Due diligence is a crucial phase in every business sale. The process helps buyers assess risks, evaluate a company’s operations, investigate its finances, and confirm the information presented by the seller. If the buyer is not satisfied with their findings during due diligence, the buyer may have leverage to negotiate a reduction in the purchase price or terminate the contract altogether. Business owners should know how to prepare their companies for the process and effectively navigate negotiations. 

Preparing for the Due Diligence Process

Due diligence involves investigating many different aspects of a company’s operations, including its financial, legal, operational, administrative, tax, environmental, and regulatory components. It’s imperative for a company to adequately prepare for this process. The following are several important steps a company should take before entering the due diligence period:

• Establish a contact person for due diligence — A company should designate one person, or multiple specific people, who will be the point of contact for the buyer during the due diligence process to stay organized and ensure efficiency. 
• Put the company’s team together — There are several moving parts regarding the due diligence process, and it’s essential to have a team of experienced advisors who can advise regarding the company’s best interests and handle any issues as they arise. The team might include an attorney, an accountant, an Human Resources professional, a business valuation expert, and various other professionals.
• Take steps to protect your company’s information — During the due diligence process, you will provide the buyer with access to sensitive and proprietary data, such as trade secrets, customer lists, and marketing strategies. As the business owner, you should take the necessary measures to safeguard this information.
• Address any known shortcomings before the due diligence process begins — If any gaps, issues, or discrepancies, such as delinquent taxes exist, remedy these deficiencies  before beginning the due diligence process. If the buyer discovers the issue, the buyer will probably ask for it to be resolved, or they could demand the company be sold at a lower purchase price, or hold back a portion of the purchase price to account for the deficiency.  
• Execute a confidentiality agreement — Before sharing any information, a company should ensure a thorough, tailored non-disclosure agreement (NDA) is in place. The NDA should clearly outline what information is considered confidential, and specify any limitations on the buyer in using the information.  
• Set up a data room — If a large amount of information is requested, it may be useful to set up a physical or virtual data room where the buyer and their attorney can review all documents in one location. 

The due diligence period can be lengthy. Without properly preparing, the process can be stalled and may lead to delays in closing the deal. Momentum should be kept throughout the process to avoid delays.  

Navigating Negotiations During the Due Diligence Process

As with all other aspects of a business sale, the due diligence process is a negotiation. While the buyer must be provided with the information they need to make informed decisions, the amount of data, the time frame, and the manner in which that data is delivered can be negotiated between the parties. After receiving the list of requested documents, the seller and the seller’s attorney must  review the request carefully and determine what information is not possible to provide — and what sensitive information could harm the company’s interests if fully disclosed. If a request would be burdensome or too difficult to comply with, the request should be negotiated.

When negotiating the documents to be provided during due diligence, a company might consider proposing alternatives. Rather than providing full access to documents that contain sensitive information, a business might summarize the information or redacted documents. This option can address the buyer’s request while limiting the exposure of proprietary information. 

Keep a record of all information provided to avoid the delays that could arise due to repeated requests. Keeping proper documentation is important for security purposes; if the deal falls through, a company will have a record of who had access to its proprietary information.        

Contact an Experienced New York Business Attorney

If you are thinking about buying or selling a business, a skillful business attorney can guide you through the due diligence process and ensure your interests are safeguarded. Providing committed counsel and trusted legal services, Brinen & Associates advises entrepreneurs and corporate owners regarding a wide variety of business matters. Call (212) 330-8151 or send us a message to learn more about how we can assist you.