How to Conduct Due Diligence When Buying a Business

You just found a website for sale that looks great. After a few conversations with the broker and seller, everything seems to point towards moving forward with a deal…but there are just a few more things you’d like to know.

Meanwhile, the broker starts to pressure you to make an offer. He explains that other buyers are getting close to submitting an offer. If they do, you could lose the business.

Should you submit an offer? If you do, you’ll lock out those other buyers. But then again, there are a few items that you aren’t sure about, and it’ll take a few days to get those in line. What should you do?

The Damage of a Withdrawn Offer

Submitting an offer is a very serious step in the process of buying a website.

Most offers are submitted in the form of a Letter of Intent (LOI). An LOI forms the basis for your final agreement, and it starts the conversation on important things such as due diligence and transition planning.

An LOI also locks out other buyers from reviewing the business or making offers (this is usually the case, but not always).

Because of this, some buyers use the LOI as a Trojan Horse. They use the LOI to lock out competition and put the seller in a position that is harder for them to negotiate.

Of course, doing this can cause a lot of damage, not only to the seller, but also to the buyer.

You Damage the Seller’s Chance of an Acquisition

Having someone back out of an LOI isn’t the end of the world for a seller. They can still find another buyer, but in reality, their chances to get the deal they wanted are now lower.

There’s two reasons for this. First, when interested buyers see that someone has made an offer, they move on to other possibilities. Once a buyer moves on, they aren’t as likely to revisit a previous deal.

Second of all, a withdrawn offer makes other buyers suspicious. Withdrawn offers conjure up images of fraud, deception, and business problems. When a site gets a stain like that, it is extremely hard to wash off.

You Damage Your Reputation with the Broker

When you withdraw an LOI without good reason, you not only annoy the seller. You also really annoy the broker.

The broker’s first duty is to serve the seller. So when an LOI is retracted, not only do you make the broker’s job more difficult, you also make the broker look bad.

As a result, brokers typically steer their clients away from buyers who have withdrawn from previous deals without good reasons. In many cases, a broker will simply blacklist you from receiving future deals.

You Might Lose Your Deposit

When you submit an LOI, many brokers (including Quiet Light) will ask for a deposit to secure the exclusive right to work with the seller. Normally, if you need to back out of an offer, you would receive this deposit back.

However, in extreme circumstances, a seller or broker may refuse to hand the deposit back. This type of situation is rare, but it could happen if you abuse the LOI.

What Should You Learn Before the LOI vs. After the LOI

An LOI does not obligate or require you to see the purchase through to the end. However, the letter is a formal statement that your intention is to see the purchase through to the end.

So you shouldn’t submit an LOI until this is actually your intention.

Verification Comes Later. For Now, Believe Everything

Before you submit an LOI, don’t worry about whether the information you get is actually true. For now, just accept what you see at face value (unless, of course, what you see at face value is obviously false).

Your only goal before submitting an offer is to answer this question: based on what I see, do I want to buy this website? If you aren’t sure, then ask more questions. But if you do want to buy the website, it’s time for the LOI.

LOIs are made and agreed upon with the condition that everything you’ve been told is accurate and complete. So once you get an LOI in place, then you can do a deep dig into the seller’s business to make sure everything the seller told you is true.

What Should I Do If Something Doesn’t Verify?

After the LOI is signed, it’s time to verify that everything the seller told you is accurate and complete. Assuming that everything checks out, the deal should close. But what if you find a significant mistake or omission?

It is not uncommon for a buyer to find a discrepancy during verification. It’s only human to err, and sometimes the omissions can be significant. Quite often, sellers do not know what information is really important to disclose, so they may inadvertently leave out important details that you discover later.

Inaccuracies or significant omissions are reasonable reasons to either renegotiate or withdraw your offer. Just be sure to communicate your reasons with the seller.

If an inaccuracy forces you to renegotiate your offer, your renegotiation should be done along the lines of the original deal.

The Broker Is Pushing Me To Submit An Offer

Unfortunately, many inexperienced brokers think that pushing a buyer to submit an offer is an acceptable practice. Therefore, some brokers will withhold important information under the condition that they’ll make it available after they’ve seen your offer.

For example, one buyer told me that another brokerage firm balked at his request for profit and loss statements. Their claim was that he was asking for too much information before submitting an offer.

Needless to say, you will not run into this issue with Quiet Light Brokerage.

If you run into a pushy broker or seller, try to explain that when you submit a Letter of Intent, you really intend to see the acquisition through to the end. Tell the broker and seller that you respect their time too much to submit an LOI before you are sure about the business.

Of course, there may be some cases where a seller’s information truly is private and cannot be disclosed before a Letter of Intent. If you run across a situation like this, respect this and learn what you can. If you then submit an LOI, be sure to note that you will need access to that protected information before you sign a binding agreement.

If a seller really is worried about sharing key information with you, you may want to suggest using a binding conditional purchase agreement. This provides some binding obligation on you and also helps protect the seller from less-than-honest buyers.

The Market Is Competitive. What If I Lose Out On a Deal?

The fear of losing out on a deal is common among many buyers. The marketplace is competitive, and there are more buyers than sellers.

But don’t let this fear push you into making an offer you can’t honor. If every buyer submitted LOI’s without the intent to buy, the entire process would fall apart.

Follow these tips to avoid being pushed into a deal you can’t or don’t want to honor:

Write a Buying Criteria Checklist

You can greatly reduce the time it takes to evaluate a deal by writing down in advance what you would be looking for in a potential acquisition. A buying criteria checklist is a powerful tool for buyers, especially those who view a lot of deals every month.

Devote More Time In Your Search

The most successful website buyers treat their search as a full-time job. They look at as many deals as possible and quickly develop a second sense for what is good and what is bad.

Accept That You’ll Lose Some Deals

Since the marketplace is competitive, accept the fact that you’ll lose some deals. Losing out on a deal is certainly not the worst thing that can happen. Rushing into a bad deal can be catastrophically worse.

To Wrap Things Up…

Submitting an LOI is a serious step in your search for an online business. Even though most LOI’s do not bind you to buying a business, they should still be taken seriously. Breaking an LOI not only damages the person selling their business, but it can also cause a lot of damage to your own reputation.

To avoid this, don’t be shy to ask a lot of questions before submitting an offer. Good and trustworthy brokers certainly won’t mind. In fact, they’ll appreciate your seriousness and respect for their time. You’ll find that if you treat brokers and their clients with respect, they’ll be more inclined to work with you.