Conducting Due Diligence on an Acquisition
After you have an offer accepted (best practices are through an Letter of Intent LOI), you will enter a due diligence period.
The purpose of due diligence is to really check the numbers are matching what you anticipated, there is synergy, and the business can continue forward with proper systems that are there.
The goal of due diligence is to eliminate surprises. You want to understand those surprises beforehand.
Best practices are for a 7 day to 90 day due diligence window, depending on how soon you want the deal to close and if there is bank financing and other third parties involved.
General guidelines are as follows.
7 Day Due Diligence – All cash deal, small business, extremely great value, Quick Close, Fear Someone Else Might Buy This
14 Day Due Diligence – Typical window for cash deals or cash + earnout deals, Most of the heavy lifting has been done, now it’s just checking some housekeeping items and making sure it is legitimate
30 Day Close – Typical due diligence periods
45 Day Close – Standard if there is financing involved, and it is a more complex deal
60 Day Close – If bank financing is involved
90 Day Close – On large M&A Deals where institutional financing is involved and/or licensing/permits are involved to transfer ownership
If your offer is accepted, you want to have a checklist that you will send to the seller to provide you with documents and other materials so you can do your due diligence.
You will also want to have several meetings to shore up any questions.
Generally, as a rule of thumb, the more you are going to ask for during due diligence, the more of a non-refundable deposit there should be. Depending on the deal, you are requesting ample time from the seller and their representation during due diligence, whilst possibly holding this off the market from someone else.
Time being spent away from their business to focus on why you should buy it, sometimes makes the business suffer slightly, so you want to respect that process. Again, it really depends on the deal and smaller deals, don’t necessarily need a deposit, which we will discuss another time.
If there is any staff in your company that will transfer over, you will want to introduce them and get them acquainted to see if there is a match and a fit.
Remember, depending on the deal the amount of requests you have will depend on the deal and often times price. If you are getting something as a fire-sale on an “AS IS” basis, due diligence will probably be limited, whereas if you are paying what the seller wants and it is dependent on everything matching up, you will have more rope to explore and do things such as come in to the operation and possibly shadow before close.
Due diligence is not training and transition, which you can bake in and negotiate in to the deal, but you will want to have a general understanding of how the business works. Obviously, you should not really be acquiring businesses you have limited to no experience in. Hopefully you have knowledge of how to grow this business and run it, but you need to understand how their systems work. You want to be able to provide value.
We will help you get the best deal on an acquisition and protect you at the same time, while ensuring we get the deal done.
Contact us for your next acquisition:
Phone: (800) 773-1523