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Website Due Diligence Vs. Don’t Do Due Diligence
By Mark Daoust
If, like a lot of other buyers, you’ve successfully completed business acquisitions or sales in the past, you probably have a pretty firm set of expectations with regard to how things “should” be done. One of those things is due diligence.
Experience is a valuable teacher, but at Quiet Light Brokerage, we believe you should approach every transaction with an open mind and—more importantly—learn everything you can about a listing BEFORE making an offer.
Dividing Discovery & Website Due Diligence
We put a strong emphasis on the distinction between discovery—i.e., what you, as the buyer, should do BEFORE making an offer—and true “due diligence,” which you should do AFTER making an offer. Incomplete discovery can cause any number of unforeseen complications in later stages of the sales process, including cancelation of the entire deal. If the seller gets discouraged by such an experience, we might even lose the listing altogether.
Since assumptions or taking things as “given” can have negative effects for everyone involved in the sale of business, we stress the value and importance of effective and thorough discovery period of the review process. If a buyer makes an offer on a business, and later changes their mind based on something they could have discovered, if they’d done their homework properly, we may take the buyer aside to reiterate the importance of comprehensive discovery in the diligence process. If it happens again with the same client, we often block their access to additional listings.
We take this approach because last-minute cancelations like this also create a serious problem for sellers. It’s likely they passed on another offer (or offers!) to accept the one from the buyer who later changed his mind, and the “back up” offer(s) may no longer be available by the time the original buyer decides to pull out of the deal.
The Discovery Period
The discovery period allows you, the potential buyer, to ask whatever questions you may have, without the expectation of complete answers or “proof” of their veracity. Some common questions you may want to ask during this period include:
- Do I really want this business?
- Am I prepared for the sacrifices involved in business ownership?
- Do I have the know-how and skills to run it?
- Do I have the staff required to take over?
- Have I thought through the logistics necessary for a smooth transition?
- Are the seller’s numbers, as presented, adequate for the price I’m offering?
- Do I feel confident with the number of suppliers, their stability, etc.?
- Are the business’ marketing budget and website traffic sustainable and acceptable?
- Are the terms and conditions on any transferring accounts acceptable?
- What licensing is required for the business?
- Is financing readily available?
- Have I addressed financing pre-qualification (if relevant)?
Answering these questions will help you form a more complete picture of the business, your goals and aspirations for it, and your capabilities with regard to a successful transition. The answers will also provide you with a firm foundation for the next step in the process—verification via due diligence.
The Due Diligence Period
Your questions have been asked and answered, and you’ve made an offer. Now it’s time to verify that the information you’ve received during discovery is up to date, factual, and complete. The due diligence period is your opportunity to:
- Review third-party documentation (e.g., merchant statements, bank statements, etc.) to verify the financial information provided by the seller.
- Speak with vendors to establish continued positive relationships.
- Talk to your new employees to ensure continuity of workforce.
- Handle all necessary licensing.
- Set up an LLC (or other business type).
- Close out financing.
Unlike the discovery phase, due diligence carries an expectation that the seller will provide proof of their claims. Again, however, it’s important to understand that this is the time to verify claims, not uncover new or surprising information that may sour the deal.
In my experience, the due diligence process—after an appropriate and comprehensive discovery—works as intended. Conducting an exhaustive discovery prior to making an offer, and thorough due diligence afterward, will help you avoid tendering an offer based on faulty or incomplete information, and help ensure a smooth and successful sale for everyone involved.