Buying a Business and the Due Diligence Period

We recently received a great question asked by someone interested in buying a business. The question is, “what is the due diligence period?”

Hi, my name is Nathan Goldstein and I am the CEO of Vested Business Brokers, we help people buy and sell profitable, privately held businesses for sale since 2001. In that period of time with helped close more than 1000 transactions.

Folks, the due diligence period is the most serious part of a deal. It is probably the scariest part for either buyer or seller because during this time the seller is disclosing to the potential buyer all the financial information relating to his business. And, it’s the buyer’s job to make sure that whatever representations the seller is making are 100% truthful, correct and accurate.

So, as you can imagine, this is a crucial time period for the parties to a transaction…and it is the time when you, as the buyer, have to be the most serious entrepreneur about your deal. You really need to dot the i’s and cross the t’s…as it were.

This is very important…You SHOULD have competent professionals help you during the due diligence period. At Vested, we strongly recommend that you get a CPA with forensic accounting experience or somebody who understands small business. You need to get him in there and make sure that the seller’s financial representations are accurate.

If for any reason you are not comfortable with the seller’s numbers during due diligence you have two options.

  1. You could walk away from the deal, or
  2. If you really like the deal and you think you could improve the business you could ask the seller for an adjustment in the price because you try to price it and you priced your deal based on his representations.

If his representations cannot be proven, let’s say for instance, a seller says he is making 200k and, after your due diligence you find he’s only making 150k, that extra 50 thousand dollars can dramatically effect the price of the business.

As a business buyer you have to be very thorough when you are doing your due diligence. You can’t just agree and say, “I am going to spend 300 hundred thousand dollars on a business that is really only worth 200 because instead of the guy saying that he is making 150 he is only making 100.”

In the context of doing your due diligence you need to be aware of the multiple or market value of the type of business you’re looking at…making sure that you can prove all the numbers that the seller’s representations are accurate.

Be patient, deals are not easy but they are worth the time and effort.

If you need help you can call us at (877) 735-5224.