Due Diligence Checklist for Buyers & Sellers

A signed letter of intent (LOI) is only the first step to having an agreement between a business buyer and seller. This agreement is non-binding and its purpose is to serve as an outline of business terms and key agreement points prior to the signing of a Definitive Purchase Agreement. Although an LOI is a significant step, it’s important to remember that the deal isn’t guaranteed at this point until many other details have been addressed.

The due diligence process is an extremely important period of time in a business sale. A buyer assesses the pros and cons of an acquisition by examining the past, present and future potential of the business to be purchased. It is during this time that a buyer truly decides whether or not to move forward with a given deal. Certain discoveries in this period may even prompt a buyer to renegotiate the price or even withdraw from the deal altogether.

Depending on a buyers’ experience, they may want to assemble a team of experts to help interpret complex information and guide them through the due diligence process. Experts such as appraisers, accountants, lawyers and even an individual with industry expertise would all be valuable to assessing a business purchase.

Due diligence is a team effort that needs to involve both buyer and seller. The process goes smoothly when sellers support buyers by supplying accurate and timely information upon request and buyers follow an organized process to obtaining, analyzing and responding to this information.

Here is a checklist to help buyers and sellers prepare for the exchange of information that will take place during the due diligence period.

Due Diligence Checklist

Financial Review

This is crucial to evaluating the current and future financial health of the business available for purchase. Within the Balance Sheet, pay particular attention to accounts receivables, especially those aged 90 days or greater or any outstanding bad debts. Inventory is another target category to review for any excess or obsolete inventory. A review of the current financial statements will be a necessary step to assessing if the company is on track to achieve sales and profit targets and how they compare to prior years.

Business Margin Review

Every industry is slightly different, so a thorough review of sales by division, by product line and all pricing policies is important to the success of a deal. As a final check, it is prudent to compare these findings to industry standards.

Key Customers

Obtain a list of the company’s top five to ten customers and assess their revenue contribution over the past three years to gauge stability and to assess any trends.

Human Resources

Obtain information about key staff and their responsibilities. It is important to determine if any employees are responsible for the day to day operations of the business and their likelihood of remaining with the business post sale. A review of the compensation structure is another important item to consider within this category.

Marketing

Assess the marketing efforts of the business and compare to those of its competitors to determine if the if the brand has had sufficient exposure and that the plan could be replicated under new ownership.

Other Considerations

There are a variety of other key considerations that may come into play when assessing a business for purchase such as barriers to entry, trademarks, assets that can be sold, growth potential, environmental reports, and transferable tangible assets.

Proper due diligence takes time and effort on the part of both buyer and seller, but it is worth it when it’s the magic that advances a deal to a binding definitive purchase agreement.

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