Tips on how to perform due diligence on a business you want to buy. Plus: What it takes to close the deal.
Now that you've made your offer, it's time to get your hands dirty. This is the stage before you close the deal where you take your detailed checklist to make sure that you can verify every aspect of the business about which the seller has told you. Your lawyer and accountant should also play a role in helping you uncover anything unusual about the business that the seller didn't disclose, such as any pending lawsuits or liens against the business's assets. You typically will have about two to four weeks to complete the process.
This can be the most important stage of buying a business, according to Anja Bernier, president of Efficient Evolutions, a business brokerage in Newton, Massachusetts. "You are truly putting your net worth on the line if you fail to take the time to dig beyond the P&L," she says. A typical due diligence process can involve as many as 150 different items covering the legal, finance, and human resource components of the business, she says.
The following guide details how to perform due diligence on a business you want to buy, as well as what it takes to finally close the deal and take over your new business.
Performing Due Diligence
Key Areas That Get Overlooked
While most sellers wouldn't knowingly withhold information from you, the onus is still on the buyer to uncover any potential pitfalls. It's also why some 90 percent of business sales fall apart at this stage of the process. Some of the more prickly areas to dig into during the due diligence phase include:
Closing the Deal
Signing Your Life Away
Try to ignore those cold feet of yours. All that hopefully remains is for you to affix your signature to all the documents and paperwork you'll need to make your ownership official, a list that will include things like:
Your lawyer will also have you and the seller sign documents attesting to the fact that the business's assets are now free and clear. At the same time, your accountant will have you sign the purchase price allocation agreement, a document that breaks down the value of the company's tangible assets like inventory and contracts and intangible assets like good will. How those numbers are allocated will determine how much tax each you and the seller owe based on the transaction, so, when possible, let your accountant negotiate the relevant terms with the seller's accountant to minimize any further negotiating tension. This also speaks to the value of having third-party representatives like brokers to help speed the end game along, says Andrew Rogerson, a business transfer agent with Murphy Business, in Sacramento, California.
As much as you might have tried to iron out wrinkles with the seller before now, though, you may need to be prepared to deal with a few more. That's why Berg recommends that as one of the first things you do when you show up at the close is to put down a cashier's check or equivalent right in the middle of the table, just where the seller can see it and stare at it. "I often find that when a seller sees their money, they become much more conciliatory when it comes to finding middle ground," he says. After that, of course, it's safe to pop open that bottle of champagne.
Post-Mortem: Prepare a 30-day Plan
As a new business owner, there are a series of steps you should take within the first month to start your new investment on the right foot.
After the first 30 days, however, once you've grown comfortable in your new role, you'll most likely look forward to taking the reigns yourself and doing some thing your own way. As Peter Siegel, founder of USABizMart.com, says, "You're moving into growth mode while the seller is sliding into golf mode."
DARREN DAHL is a contributing editor at Inc. Magazine, which he has written for since 2004. He also works as a collaborative writer and editor and has partnered with several high-profile authors. Dahl lives in Asheville, NC.