Due Diligence Process: Handling Issues That Arise

Remember how we talked about all the material you should be ready to provide the buyer during the due diligence process.

Of course buyers don't examine all this material expecting that things are better than you had said. They will assume there are at least some things that are not as good as you have represented and they will be seeking them out.

Accounts Receivable And Inventory

These areas are often a point of contention during due diligence for two reasons. The value you placed on your business, and the asking price you set, were directly affected by how you value your inventory and accounts receivable.

And the second reason is that their exact value has probably changed since you appraised your business.

If you haven't been as aggressive with customers who pay late you may find that the percentage of accounts receivable that are more than 90 days past due has gone up.

If you have tried to cut corners by carrying less inventory the buyer may want the selling price adjusted down. The buyer's due diligence may uncover the fact that your inventory now consists of more old or discontinued items than it did months ago when you last appraised it's value.

If you are a manufacturer, you may find that the distribution in your inventory has shifted to more raw materials or works in progress and less finished goods that are ready to be sold and shipped.

These are common issues and shouldn't kill a deal or raise suspicions within the buyer. Some adjustment of the price may be reasonable.

Be prepared to deal with the buyer's feedback on these issues. If you have been honest and forthright with the buyer up to this point, there is no reason why you can't work out an agreement if in fact the value of you inventory or accounts receivable have changed significantly in the months since you first placed a value on your business.

Red Flags Buyers Look For

If your business is struggling with some of the issues listed below and you haven't yet put your business on the market, you should consider delaying the sale so you can clear these things up.

If your business is on the market and you are already dealing with buyers, then you should be honest about the issues facing the business and do all you can to correct them as soon as possible.

If you are being sued by a customer, audited by the IRS or your equipment is falling apart due to neglect the buyer will find out.

Have a game plan ready to fix and/or explain these issues. While you may need to adjust the price slightly for changes in your inventory or accounts receivable, the issues below will likely kill any deal if the seller has attempted to hide them.

Litigation: Any recent or pending litigation can be an issue but especially if it is related to product liability.

Tax Problems: Are all taxes up to date including unemployment and federal withholding taxes? Is the business being audited?

Environmental Issues: The buyer may be liable for environmental cleanups even if the problem existed before they bought. And this isn't just a problem for large manufacturers but also for many small businesses such as gas stations and dry cleaners.

Unrecorded Liabilities: Depending on the size of your workforce this could be a major concern for the buyer. Do you owe your employees a lot of accrued vacation time? Are there any unfunded health care and/or pension liabilities for retirees?

Deferred Maintenance: If you have tried to lower your costs by delaying or skipping needed maintenance on vehicles and equipment now could be the time it catches up with you. The buyer will also want to confirm that the age and overall quality of the equipment is the same as you stated.

How To Conduct Due Diligence On The Buyer

Due Diligence is a two way street.

While the term is normally associated with the buyer checking you out, you will definitely want to research the buyer's background and qualifications as well.

Although the investigation the buyer performs will take place within a well defined window of time, the due diligence you perform on the buyer should be an ongoing process that begins as soon as you first talk with them.

Below are 5 different sources of information you can use to assess the buyer.

The first three should be done early on in the selling process because you want to know up front if the buyer is qualified to buy and prepared to successfully run the business.

1. Buyer's Financial Statements

You can tell a lot about a buyer by how prepared and willing they are to prove they are a qualified buyer. Because you have much confidential information that you only want to share with the most qualified buyers, the buyer's up-to-date financial statements should be provided at the very start along with their signed confidentiality agreement.

Even if you are not financing any part of the sale, you will be investing a lot of time and sharing a lot of personal information, so you should require a financial statement up front.

2. Buyer's Credit History

You can check the buyer's personal credit history with any or all of the three leading nation credit reporting agencies. You will need the buyer's full name, social security number and current address.

If the buyer's financial statements are impressive and he strikes you as a quality candidate you may want to delay the credit check. It will cost you money each time you request a report from one of the credit agencies. Also, too many inquiries on a person's credit report will lower their credit score.

So for the benefit of you and the buyer you may want to wait until the buyer has read you Selling Memorandum. Some prospects may not be interested after they read your memorandum so you save yourself some time and money if you wait until the buyer has expressed some serious interest in your business.

But certainly, before you accept the buyer's Letter Of Intent, you should check his credit reports.

3. Buyer's Resume

Experienced and qualified business people will understand your need to qualify them and they will have usually already taken the time to write a resume complete with references. If they don't present you with one up front, it's appropriate for you to ask for one.

4. Buyer's Business Plan

At the very least, the buyer should be able to explain to you how they plan to run the business and what they plan to do in order to grow the business. Given the fact that many businesses experience a decrease in sales immediately after a sale, the buyer should be able to explain how they plan to make payments to you in those first few months.

They may or may not take the time to put together a formal business plan but if they do, it can be a great tool for you to assess their chances of success with your business.

An overly optimistic or naive plan will tell you a lot about the buyers chances of success.

5. Third Party Input

If you have any doubts at all about the buyer's abilities and/or ethics at this point you should gather as much information as you can from third parties.

This could include talking to any people who have had business dealings with the buyer in the past. Especially if the buyer has been dropping the names of well known business people or political leaders from the area. You should talk to these people to verify the buyer's stories or any claims of great success.

If your business requires certain licenses, you should check with the appropriate state licensing agencies for any information they have on the buyer. They should be able to tell you if the buyer has any complaints from consumers or has ever been disciplined by the agency.

Lastly you can check court records in your county to see if the buyer has been sued as a result of any of his previous business dealing. Also, don't discount the importance of the buyer being the initiator of any lawsuits. If your buyer has a history of suing others over minor business disputes you could be next.

A lot of this is common sense, be honest with the buyer throughout the process and the due diligence period should not be much of an issue.

Author’s bio: David Hoang works as a copywriter for writeanypapers.com. He used to be a web designer, but he decided to change his career. In this case, David has an opportunity to tell others how to create a perfect website design.

Published by ExitAdviser


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