Is Your Buyer Legit?

When selling your business, it's important to do your due diligence when researching potential buyers. Don't be hoodwinked.

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An easy definition of due diligence is "serious investigation."

In almost all sales, due diligence is a condition of the buyer's offer. Only after determining that your business meets the buyer’s expectations - or that problem conditions have or will be satisfactorily addressed - will the buyer remove the due diligence contingency and close the deal.

During due diligence, as the seller you need to be ready on two fronts:

You need to be prepared to provide access to all the information the buyer will want to examine.
You'll want to be ready to simultaneously examine your buyer's financial condition and managerial experience, especially if you'll be carrying a seller-financed loan or agreeing to accept deferred payments for a portion of the purchase price.

Step 1. Assemble the documentation you'll need to provide.

Use the following checklist of information likely to be required by the buyer during due diligence:

Description of Material Likely to be Requested During the Buyer's Due Diligence
	Corporate or Schedule C tax returns for Past 2-3 years, allowing buyer to verify the revenues shown on financial statements.
	Business financial statements for the current and past 2-3 years including income statements, balance sheets, current cash flow statement, each presented in formal, professionally reviewed reports following industry standards. If you don’t have these materials, you should speak to your accountant, broker or another professional to get help in preparing them.
	Annual owner's cash flow or seller's discretionary earnings statement that recasts your most recent annual income statement to reflect revenues and all essential operating costs without extraordinary, one-time or discretionary expenditures, therefore accurately presenting how much money the business actually generates for the benefit of its owner.
	Financial trends and ratios including such information as revenue and profit growth trends.
	Accounts receivables/accounts payable lists
	Inventory list including value
	Major equipment and furnishings lists including value.
	Supporting financial information such as inventory turnover rate, receivables collection rate, and current or liquidity ratio.
	Current building lease including information on lease duration and transferability
	Fixtures, furnishings and equipment list indicating all items included in the sale, along with photos of major items, titles confirming ownership, lease and maintenance agreements, and depreciation schedules from most recent tax return.
	Copies of contracts and agreements with employees, customers, suppliers, distributors and others.
	Intellectual property documentation for patents, trademarks and other items, each showing ownership by the business rather than by individuals.
	Management and operational documentation including procedural manuals, product and pricing lists, other reports and agreements.
	Staffing records including list of employees with hire dates, salaries, contracts, and benefit summaries; description of employee benefits plan, organization chart and employment policy manual.
	Client information including information on transferable databases.
	Supplier and distributor lists including relationship descriptions and agreements.
	Business and marketing plans or summary descriptions.
	Business formation documents.

Mike Handelsman is group general manager for BizBuySell.com and BizQuest.com, the Internet's largest and most heavily trafficked business-for-sale marketplaces. @BizBuySell