Due Diligence

I had a huge argument with a business broker and seller recently regarding a business where I am representing the buyer and their insane demands regarding the limited amount of time they wanted to give the buyer to do their formalized due diligence.

These two geniuses wanted to restrict the buyer’s review for a business with over three million dollars in sales, more than 65,000 client transactions per year and three separate locations to five calendar days.

The broker and seller insisted on this period which borders on insanity in my opinion and they insisted “that’s all the time needed”. At the bare minimum, in my opinion, the buyer would need at least three weeks for an effective review. But wait, it gets better: the seller/broker insisted on a clause whereby if the figures are deemed to be within five percent of what was represented, the buyer will have to “accept” the review. That is nuts – imagine if the numbers are dead on correct but the buyer learns that one of the landlords won’t renew or assign their lease. Should the buyer still be bound by the agreement? Come on, that is madness.

In the nine businesses I have sold, I have always extended as much time as the buyer needed for them to do a thorough review. First, I had nothing to hide. Second, my strategy as a seller has always been that if I find a qualified buyer, I want them to get to the closing table and not walk from the deal because they lacked insight to the business or were not able to complete their review effectively. Interestingly enough, I have had a buyer request more than 30 days which was in a $5.0 million business.

The business I referred to above is a three store chain of pool supply products. Each of the locations uses a different set of books, all locations are incorporated individually, there are three different landlords, lease terms, and the buying of products is done at store level and not consolidated. The product selection is very similar at each location but even the square footage varies significantly from one to the other. While the books and records are in good shape, the reality is that a financial review had to be done independently for all three stores so in effect, it was like buying three separate businesses for the buyer.

As someone who has bought eleven business of my own and has represented both buyers and sellers in a broker capacity, I am extremely sensitive about this stage of the buying process and my position never waivers regardless of what side I am on which is:

A buyer needs an adequate amount of time to analyze the business – end of story.

Any broker or seller who pushes to have it done within an unreasonable time frame is simply asking for a deal to fall apart.

At the same time, a buyer must be reasonable and cannot take forever to make their decision. The longer they take, the more likely they will not go through with the purchase so all sides need to have urgency, but prudence.

When it comes to determining how long is needed for the formalized due diligence phase, the business type itself will dictate the amount of time needed of course – a small gift card store does not need anywhere near the time as a major manufacturing or distribution business.

Additionally, the condition of the company records will play a major role in how quickly the financial review can be done. By the way, reviewing the numbers itself is usually the shortest part. What about analyzing company contracts, clients, competitors, legal issues, employees, etc.? A formal and proper due diligence goes way beyond the numbers!

Certainly, a buyer needs an adequate amount of time and it should not go on to perpetuity.

Interestingly enough, in larger deals, the due diligence phase typically lasts right up to the closing date so in fact, the buyers can rescind their offer right to the last minute (sometimes there can be penalties).

No matter what size business you may be buying, give yourself enough time to review it properly so you can make a prudent decision. Never get bullied into a period that will cause you to do an incomplete job. My point to the broker and seller was that if the buyer does not address all of the issues because of a lack of time they will simply walk from the deal so what’s the point of restricting them from conducting a complete review? Unless of course they have something to hide…hmmm.


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