Phase 5:

The Close

Once we have agreed upon the key issues of the sale of your business, and the letter of intent (LOI) that spells out the price, down payment, financing and summarizes the key business issues is signed, the due diligence phase begins.

The LOI leads to the definitive purchase agreement, which sets forth additional terms and conditions of the sale and a host of ancillary agreements, such as noncompetition, opinions of counsel, earnouts, securitization, and employment agreements to name a few.

Also included will be all the legal details such as a list of representations and warranties for the seller and buyer. The buyer wants you to certify certain facts regarding the condition of your business.

This purchase agreement will contain conditions which must be satisfied in order for you and the seller to complete the transaction. One of these conditions will be the completion of the “Due Diligence Review”. The due diligence review exists to protect both you and the buyer. The goal of the investigation is for the buyer to fully understand the business, its markets, customers, legal position, and any risks inherent in the transaction.

From your perspective, the due diligence process is your opportunity to disclose to the buyer all facts and information about your business, relieving any anxiety they have about the acquisition.

Why Business Sales Take So Long

The due diligence investigation is the single biggest reason that the time to close a business sale transaction has increased four-fold in the last twenty years. Buyers are scrutinizing the details like never before, and any single “surprise” can cause a significant delay or ruin the deal altogether.

That’s why we spend so much time and energy collecting information, documenting issues, and bringing transparency to the entire sales process, before we ever speak with a buyer.

The key to shortening the due diligence investigation (sometimes by that same factor of four) is to have everything ready and organized prior to the beginning of the transaction.

We’re going to anticipate the items that the buyer will need, and have them ready for delivery within a moment’s notice.

We don’t want any surprises for the buyer, if at all possible. With each negative discovery, the buyer loses confidence in your business, and will either demand a lower price, or if enough surprises have been uncovered, walk away entirely. A failed transaction means a considerable loss of time and professional fees paid to attorneys and accountants.

You have to remember that what’s familiar to you is new to the buyer. They’re already nervous about the purchase even before they see any documentation or detailed information. Our job is to reduce their anxiety by quickly providing all the information they need with full disclosure.

What Will We Need?

As part of the due diligence process, we’ll ask you for a number of documents and information. This list might include (this is a partial list):

  • Corporate information: organization charts; company charter and Bylaws; meeting minutes; stock books; office locations; and lists of your consultants, advisors, etc.
  • Corporate transactions: stockholder list; copies of notes, loans, credit agreements, mortgages, deeds, etc.; shareholder agreements; stock purchase agreements
  • Management & Employees: organization chart, including resumes; list of key employees; list of current officers; management reports; employee contracts and independent contractor agreements; employee handbook
  • Operations: copies of contracts & agreements; copies of marketing materials, brochures, etc.; copies of leases, sub-leases, etc.; standard forms of agreements; trademarks, copyrights, etc.; facilities leases and equipment leases; equipment list.
  • Financials: copies of financial statements; letters issued by accountants; budget information; AR and AP aging reports.
  • Legal: lists of complaints, claims, and any pending or past litigation; description of outstanding judgments, orders, etc.; pending actions or investigations.
  • Miscellaneous: insurance policies; planning or strategy statements; any industry reports or industry analysis; copies of audit reports covering pension, retirement or employee benefit plans; real estate surveys, title reports or appraisals made in the last three years.

The most important thing to remember about the due diligence process is that it doesn’t have to be hard. By doing the necessary work up front in gathering and organizing everything we expect the buyer to need, we’ll smooth the process, quickly alleviate the buyer’s concerns, and pave the way to a successful transaction.