Best Practices for Facilitating Due Diligence in the Sale of a Business

Jun 14, 2016

IBA has a reputation in the entrepreneurial community for facilitating a high quality due diligence process that creates an environment of full disclosure and transparency between the parties prior to the transfer of ownership. It is our corporate philosophy, as a firm that specializes in sell side representation of owners of privately held companies & family owned businesses in Washington, Oregon, and Alaska, that a comprehensive due diligence is in the best interest of both parties. The primary advantage of a comprehensive due diligence to the seller is it minimizes post transaction liability. The primary advantage to the buyer is a comprehensive due diligence allows them to accurately assess the risk & reward potential of the contemplated acquisition.

The first component of a properly facilitated due diligence process is clearly defined parameters for the time frame for collection and review of information & documentation. It is our recommendation that the buyer be provided approximately a business week to generate a list of all the information & documentation they would like to review during due diligence. The list the buyer provides to the seller should combine requests from their attorney, accountant, banker, and any other professional advisers to allow the seller to assemble the information & documentation as efficiently as possible.
Supplemental information & documentation requests are encouraged from the buyer if the preliminary set leads to additional areas of investigation. However, a piecemeal stream of requests is discouraged, as the probability of requests failing to be addressed increases significantly in this scenario. A consolidated list of requested information & documentation should be maintained & updated as items are received by the buyer and circulated periodically to relevant parties to convey which information & documentation has been received and which items are outstanding.

The second stage of a properly facilitated due diligence process involves the buyer’s review of information and documentation along with their professional advisers. It is our recommendation that the time period to review information & documentation start upon receipt of all requested items to provide motivation to the seller to provide all information & documentation in a timely manner to the buyer. The time period should be long enough to allow for a thorough review of information & documentation by the buyer & their professional advisers, but short enough to encourage deployment of review resources in a timely manner. The goal of due diligence is to verify the information used to formulate an offer. If the presentation of information was accurate and provided sufficient transparency about business operations prior to reaching agreement on a letter of intent, the probability of a transaction failing during the due diligence period is low.

It is common in transactions facilitated by IBA to separate due diligence into two stages. The first stage is noninvasive due diligence. This is the stage of due diligence where information & documentation is reviewed off site in a manner that maintains confidentiality that a sale of a company is being contemplated. It is common for financial records, leases, bank statements, employee records, and other documentation to be reviewed during this stage, often by the buyer’s CPA or CFO. The business & ownership have limited risk during this stage of due diligence. The second stage of due diligence is the invasive due diligence stage. This is the stage of due diligence where employees, key customers, and/or significant suppliers are approached by the buyer to fill in gaps in information ranging from retention probability to market perception of the entity. This is a very delicate stage of due diligence, which although often warranted, can cause turbulence for the business if a transaction is not completed in a timely manner. It is our corporate recommendation that invasive due diligence not be commenced until noninvasive due diligence is completed, an asset sale or stock sale agreement is executed, and financing, if necessary, is secured.

Due diligence is a necessary step in the sale of a privately held company or family owned business, however similar to the importance of a pilot to air travel, it requires a business brokerage professional with knowledge, experience, and professionalism to facilitate the process correctly, so both parties can achieve their relevant goals from the process without detrimentally impacting the business.

IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media and the mergers & acquisitions community on confidentiality and any other subjects relevant to the purchase & sale of a business.