While there are a wide array of parameters to establishing the due diligence period which could last anywhere from a few days until the actual closing, there are, nevertheless, some common issues that all parties need to consider which will be discussed over the next few blog/newsletter posts.
Today, I want to discuss the following:
When does the due diligence period begin?
It is estimated that fifty percent of all deals that enter the formal due diligence stage never make it to the closing table. This has always been a staggering and disturbing statistic to me but not at all surprising. There are a number of reasons for this dismal statistic, but the common denominator is the end of the period arrived and there was too much uncertainty for the buyer to move forward and close the deal. One key ingredient that leads to this is the buyer's lack of preparation to complete an exhaustive review in the period allocated. Had they addressed these issues from the beginning as I have discussed, often times those unresolved issues could be satisfied and the uncertainly eliminated or diminished.
What should the buyer’s agenda be?
Some buyers go into due diligence looking for problems with the express hope of being able to renegotiate the deal. This is the wrong strategy.
Basic protections a buyer should have in place
One clause I have seen in contracts is where the buyer is deemed to have accepted the due diligence period if the company revenues/profits are within a certain percentage of what was initially represented. Well, what if indeed this is the case, but the buyer discovers that one client represents 80 percent of the sales, or the company just lost a major customer, or its lease won’t be renewed, or a major supplier won’t supply a new owner, or there is a multi-year major road construction project being planned for the main access way to the business and all traffic will be re-routed? The potential issues that could influence a buyer to not to proceed with a deal are endless so it does not make any sense to be locked into anything until the period is over and the buyer can make a prudent decision either way.
Due diligence is the buyer’s period. It is their time to complete the tangible analysis and also reconcile the psychological factors. In other words, it is an exercise of both logic and emotion.
Next edition we will discuss how to separate minor issues from major ones, what if a buyer has to renegotiate the deal based upon their findings and how to conduct a thorough review given the concernss every seller has about due diligence.
Have a great week.
Diomo.com – The Business Buyer Resource Center™
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