What is Due Diligence?
Due Diligence Defined: The phrase is composed of two words, “Due”, which the dictionary defines as “Proper or adequate” and “Diligence”, which is defined as “Degree of care or caution expected of a person, especially as a party to an agreement.”
The due diligence period starts once an offer is accepted. This period may vary in length of time depending upon the terms of the offer. It can run for as little as 14 days and for large M&A transactions can take as long as 60-90 days. Average is 21-30 days for a small business two million in sales price.
Seller Due Diligence
During this period, the Seller evaluates the Buyer’s credit worthiness and their qualifications to purchase and operate the Business successfully.
This may be based on the Buyer’s resume, credit report, and or financial statement.
Buyer Due Diligence
The purpose of due diligence for the Buyer is to prove the Business as the Seller has represented. The Buyer will request certain items from the Seller to verify what has been represented as true. Typically, the Buyer will request profit and loss statements, balance sheets, and tax returns; however, depending upon the Business, the Buyer may request other verifying documentation. Please click to view a sample due diligence checklist that the Buyer will sign and submit to the Seller.
In many cases the potential buyer is not financially savvy so will hire an accountant to assist with the due diligence. This is wise. Sunbelt has various list for a Buyer to choose from depending on the size and complexity of the company. A different list will be needed for Stock Sales.