What is involved in Due Diligence?

If you have never been through a due diligence, you are likely in for a rude surprise. Even if you have been through a due diligence process, it is still difficult and demanding. Due diligence is often the most stressful portion of a deal. More deals are lost as a result of the stress due diligence plays on both parties than those that are lost on the actual details of a business.

Knowing what to expect can greatly reduce that stress, make the process go quicker, and also reduce the possibility of a renegotiation or cancellation from the buyer.

What is the Purpose of Due Diligence

Due diligence is the process of verifying what has been represented and also verifying that there has not been any significant omissions by the seller.  Most of due diligence serves to verify the legal status, the financials, past history of the business, and your general ability to sell the business. Additionally, a buyer may verify different aspects of the company to make sure it is in good health. In many ways, due diligence is akin to bringing a used car to a mechanic for a thorough inspection before you buy it.

A proper due diligence is important for both the buyer and the seller.  With significant assets at stake for both parties, having a proper due diligence and having assurance that the buyer is fully aware of what they are buying – benefits and risks included – reduces the possibility of a dispute after the closing.

So while due diligence may be uncomfortable for the seller, a seller should take comfort knowing that a proper due diligence helps protect them after the sale.

Be Prepared with 3rd Party Statements

You should always expect to verify your business with 3rd party documents. Bank statements, tax returns, merchant statements, corporate filings, etc. A buyer may request multiple forms of verification as well, such as tax returns and bank statements.

Many sellers complain about the sheer volume of documents requested in due diligence. The fact is, document requests from buyers can lead to crates full of information.  If you know that you are planning to sell your website sometime in the near future (3 months – 1 year), preparing a custom due diligence package can help tremendously reduce stress at the time of the sale.  Most sellers are woefully underprepared to collect extensive documentation and end up doing so when there is an offer on their business. By preparing ahead of time for due diligence, you can simply modify what you have already put together to match what your buyer is looking for.

Dealing With Sensitive Information

One of the common complaints we receive from sellers is that the information being asked for in due diligence is very sensitive. This is certainly a legitimate complaint and concern.  Some businesses have unique competitive advantages that, if exploited, would pose a potential threat.

One of the most common concerns we hear about from sellers is a buyer’s request for a list of vendors and their contact information.  From the seller’s perspective, a vendor list is a unique aspect of their business that sets it apart from others.  From a buyer’s perspective, knowing that the vendors will work with them under the same terms is an essential item to verify before paying for the business.

When entering into due diligence, we typically try to find the least sensitive items to verify first as well as identify the items that are most likely to trip up the sale.  By doing this, if we can pass the trickiest parts of due diligence, we can move on to more sensitive items with confidence. Conversely, if due diligence fails early on, then less of your business is exposed through the process.

Although some sensitive information will likely need to be shown, managing the process in the right manner can limit your exposure.

Expect Additional Requests

Due diligence usually starts with one list of requests and questions, but it hardly ever ends there. When a buyer explores your business in detail, what is likely going to happen is that various areas will trigger additional questions and concerns. Always expect that due diligence will consist of multiple rounds.

One of the advantages of working with a broker like Quiet Light is that we can help identify what are reasonable buyer requests and when a buyer request is becoming a stall tactic. Dealing with unreasonable buyer requests takes tact and an objective viewpoint – a viewpoint that we often provide.

In Conclusion, Have a Plan

As a seller, due diligence may seem like something you want to avoid, but for reasons stated above, this is not the case. As a seller, you should want your buyer to know exactly what they are receiving so that there are no surprises. Surprises after an acquisition lead to problems and lawsuits, something no one wants to see.

Because of the detailed nature of due diligence, if you can prepare and gather your documentation months before putting your site on the market, you will be able to conduct your due diligence requests in a much less stress-filled environment.  As with all things related to selling your website, preparation is key.