Due Diligence Is A Two-Way Street
In the process of a business transaction most buyers conduct a due diligence review of the seller’s company. While it can be argued that due diligence begins from the first contact, there is typically a due diligence period that begins when parties sign a Letter of Intent (LOI) and initiate the development of the Definitive Purchase Agreement. At this time the buyer often presents the seller with a list of required documents to be reviewed along with other requests to satisfy any buyer concerns. Sales price and terms may be further negotiated during this time based on what is discovered. A deal may also be scuttled.
It is a common misconception that due diligence is a one-way street, with only the buyer assessing the seller. Sellers often have their own valid questions which include the following:
- Can the potential buyer financially consummate the deal? Can the buyer produce enough cash to write a check?
- Is the buyer a good match for the marketplace? Does the buyer or buyer representative have the skill to successfully execute the business plan? This is a big deal when there is a seller “carryback” of some portion of the sales price.
- Is the buyer a good cultural match for the seller’s company? Does the buyer have a viable plan for integration if there is a merger of operations planned? Will key managers of the seller still have employment after the transaction?
- Does the buyer have enough excess cash to sustain and grow the operation?
While there are other question depending on the circumstances, including a carryback scenario, they illustrate the two-way nature of the due diligence process. When sellers assume they are an inferior party to the transaction they increase the risk of an inferior deal.