Confirming all the information you receive from the seller is accurate and that the financial records match the tax returns of the business you are purchasing is Due Diligence. A certain level of trust must be present for a seller and buyer to have a smooth sale and transition, but you must not just assume that everything is accurate. The information the seller gives you by mouth must be backed up with written information.
After you have found a business in which you are interested in purchasing and have gotten minimal information from the business broker, you will want to meet with the owner to look at the business and get some questions answered. This is an important meeting to see if you are a match for the business and to see if you and the seller are comfortable with each other. At that point, some sellers will give you their complete financials, while others will not give you the financials until you make an offer. Most people want to crunch the numbers before making an offer; but if it is not possible to receive complete financials, you will need to make the offer based on the minimal information you have received, contingent upon your final approval of the financials. This will give you complete protection to back out of the sale and have your earnest money returned if everything does not match with what you were given.
The Due Diligence period, which is usually ten days or longer, depending on the business, is the next step in the process. In addition to the financials, this is also the time to carefully look at the equipment and inventory. The date for this step to be completed will be agreed upon by the seller and buyer and included in the offer. If you are getting a loan, the date required to have that completed will also be included. If the time must be extended for any reason, it must be agreed upon in writing with signatures of both buyer and seller. It is wise to choose a business attorney and a business accountant to use when needed for your business, and consulting them at this time will be beneficial to you. Business brokers cannot give you legal or accounting advice but will assist you in getting information, writing the offer, guiding you to the person needed and keeping you on schedule through closing. Some businesses are sold with owner financing. This usually makes the closing easier, but you will need to provide to the seller the information usually required by a lending institution. Sellers usually ask for a large down payment, with the balance paid in installments at the current interest rate. When a seller finds a buyer, he/she will have questions about the history and experience of that person, as well as financial information.
A big percentage of businesses lease the building in which the business is located. If you will be leasing, it is important for the business owner to introduce you to the landlord so you can begin to work on a suitable lease. Do not delay this. While some leases can be completed rather quickly, most take time to be approved. Your offer will have a date on which you will receive a suitable lease. If this does not happen or the time to receive it cannot be extended, the offer to purchase will become void. If the owner of the business owns the property, a lease will be offered to you for your approval. You will likely have no problem agreeing on the terms of the lease; but like any lease, your offer will be void if you do not receive a suitable lease.
When you meet with the owner to get answers to your questions about the business, usually in a second meeting, it is best to have a list of your questions so you have everything answered at one time. You may want to have your business broker get your detailed questions to the seller before the meeting. Be sure to ask any question that comes to mind, as you don’t want any surprises after the sale.
Be thorough with your due diligence, as this is a very important step in purchasing a business.
