By now, you are getting the idea that due diligence is an important and complex part of the purchasing process. As described in part one, our goal is to identify any fatal flaws, verify that the information is reasonably accurate and confirm that this business will really work for us.
At Sunbelt, we organize a due diligence planning meeting inviting the seller, the seller’s accountant, your accountant, you and any other advisers you believe will be required during the diligence process. There will be a subsequent meeting with you, your broker, and your lawyer to deal with legal diligence issues and with the drafting of the agreement of purchase and sale and related documents. However, in order to minimize your costs given that you may not proceed with your acquisition, we recommend that you delay the meeting with your legal adviser until after other forms of diligence have been completed.
At this first meeting you will establish a diligence plan including an understanding of what documentation exists, what is required to be reviewed, who will be providing it, when it will be provided, and who will be reviewing it. Your broker will assist you in developing your plan and ensuring that the documentation is provided.
Keep in mind that you can review only what exists. You may wish to see audited financial statements but it is rare that small businesses have audited statements. Physical inspections of plant and equipment and inventory are typically done during off hours when employees are not present at the business.
Once financial, operational, market, and HR diligence have been completed to your satisfaction it is time to begin the process with the tax and transaction lawyer you have retained. Their goal is to arrive at a structure that works for both parties as well as drafting the documentation to implement your agreement. They will also undertake the appropriate searches to ensure there are no undisclosed liabilities, that corporate filings are current, that the minute book is up to date, and that both tangible and intangible assets being transferred are free and clear.
Use a specialist to do this. Most lawyers are focused on other legal practices and not familiar with tax and transaction and intellectual property law. Get an estimate of fees from your accountant and from your lawyer prior to embarking upon the due diligence and closing process. Sunbelt can provide referrals to a number of experienced accounting and legal professionals who can assist you.
Sequencing and timing
The due diligence process can take anywhere from two to six weeks depending on the complexity and availability of documentation. The legal diligence and drafting of agreements will require an additional two to four weeks. Allow sufficient time to do a thorough job without putting unnecessary pressure on your professional advisers.
Typically one of the conditions in your offer relates to you being able to secure appropriate financing for the transaction. At the completion of your first stage of diligence you will be able to prepare a business and financing plan. The eventual structure of the transaction and of the business must take into account the financing plan so it is prudent to secure a conditional commitment for your financing prior to beginning the legal diligence and drafting.
At the completion of due diligence there will still be doubts and fears however you should have enough information to decide that, all things considered, this business will probably work, or not work, for you.
Expect buyer’s remorse—it will set in about two weeks before closing. You will be nervous about the cash flow, about the impact on your lifestyle and about your ability to successfully manage and grow the business. This is perfectly normal. Talk it through with your business broker.
Likewise, the seller will be experiencing seller’s remorse. They will be nervous about your ability to successfully operate what has been their business. They will be nervous about the change in their lifestyle and worried about the financing they are providing to you. They may find it emotionally difficult to let go of their “baby”. This may be a good time to meet with the seller and your broker socially. Your job will be to alleviate the fears and concerns of the seller. Their job will be to alleviate your fears and concerns. Everyone’s goal is to make sure this is a successful win/win transaction for all parties.
Our next articles in this series will deal with closing the transaction– the legal process and the logistics. If you have questions or comments please contact one of our experienced business brokers at 1-800-905-3557 or email email@example.com. For more information and resources please visit www.sunbeltcanada.com