Due diligence is a critical step toward closing the deal when buying or selling your business. This phase comes after the letter of intent has been provided — and before the purchase agreement is drafted or signed. Whether you’re buying or selling a business, it’s important to know what to expect during this important stage. For sellers, it’s best to address any known shortcomings in advance that could surface during the due diligence phase to avoid any possible roadblocks to finalizing a deal.
What is Due Diligence When Selling a Business?
Due diligence is the process of investigating all aspects of a business before the purchase agreement is executed. This phase helps to ensure the buyer has a clear understanding of the company’s assets, liabilities, finances, and operations. Due diligence also gives the buyer the opportunity to verify that the information they have received regarding the company is accurate — and to identify any potential risks involved in their investment.
What is Covered During the Due Diligence Phase of Selling a Business?
During the due diligence phase of selling a business, the buyer will request documents and data from the seller to identify any liabilities or issues that could impact the transaction. Depending on the outcome of the due diligence process, a buyer may either negotiate a reduction in the purchase price of the business or pull out of the deal altogether. A seller needs to know what documentation they will be expected to provide so the process can run smoothly.
Several areas are covered during the due diligence phase of selling a business, including:
- Financial due diligence — The buyer will likely want to review information about the company’s financial statements, revenue, taxes, and assets and liabilities. This can help them assess profitability and cash flow trends.
- Legal due diligence — This involves reviewing legal documents, including contracts, leases, and vendor agreements. A buyer may also examine intellectual property rights and assess any past or pending litigation.
- Operational due diligence — Operational due diligence involves evaluating the company’s operations and processes. This can include information about marketing and sales strategies, inventory management, cybersecurity, production methods, and management.
- Commercial due diligence — This area of due diligence concerns examining the market position and competitiveness of a company. A buyer may review marketing strategies, growth potential, and the company’s customer base. They may also identify potential risks in the market.
- Tax due diligence — Tax due diligence involves a review of tax compliance, including income and payroll taxes to ensure there are no audits pending or disputes that are unresolved.
- Human resources due diligence — A seller should be ready to provide the buyer with employment records, employment contracts, turnover rates, and information regarding benefits packages. The buyer will also look into any employment lawsuits.
If the business is in a specific industry, due diligence will also need to be conducted based on that sector. For example, a seller may need to show that the company is compliant with the necessary regulations, and provide the buyer with copies of any licenses, registrations, and permits.
Contact an Experienced New York Business Attorney
The due diligence process associated with selling a business can be stressful and overwhelming. It’s best to have the guidance of a skillful business attorney by your side who can help you navigate the process and negotiate the documents that will be provided. Offering experienced counsel and high-quality legal services, Brinen & Associates advises clients regarding a wide variety of business matters, including those involving due diligence. Call (212) 330-8151 or send us a message to learn more about how we can assist you.