Due Diligence

I received an email this week from someone who is not a client of ours but is now in a terrible situation regarding a business they were looking to purchase. They made an awful tactical error in their offer which is now coming back to haunt them. Specifically, their offer did not detail a contingency about the lease transfer where the business operates and it is not a business one can easily relocate. Furthermore, the location itself is a significant driver of the company’s revenues.

The landlord steadfastly refused to assign the lease which in turn is causing the buyer to want to walk from the deal. However, the seller is refusing to return the buyer’s deposit specifically because they are not required to do so under the offer terms.

There is a very important lesson here.

It is critically important that any offer a buyer makes has to list out all of the major deal contingencies.

Then, for added protection, the offer has to contain a bulletproof due diligence/inspection period clause which stipulates the period in which the buyer can inspect the business and its financials, and allows any other review the buyer may wish.

Plus, and most importantly, the language must state that the buyer can rescind their offer for “any reason or no reason” up to the end of the period without jeopardizing any deposits or having any further obligation to the seller, or vice versa.

In the initial stages of analyzing a business, it can be difficult to think of every single possible issue and a buyer may inadvertently overlook something, or another issue can surface in the future after an offer is already in place.

That is why a buyer wants to have very broad due diligence language and exactly as noted above so that they do not have to worry if they somehow overlooked anything material to the transaction.

Unfortunately, in the case discussed above, the buyer will likely lose their entire deposit. Hopefully, that will not be the case but they (the buyer), really does not have any grounds to substantiate a return of the money. Sadly,

it’s a situation that could have been easily avoided, but this is exactly the type costly mistake that many inexperienced buyers make who don’t invest a bit of time to educate themselves about buying a business and what has to be done at each step.

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