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The M&A Due Diligence Process

The due diligence process plays a crucial role in successfully closing on an acquisition. Due diligence is the process of researching and investigating the financial, operational, and legal aspects of a business to assess the potential risks and verify the value of the business. This typically occurs after a prospective purchaser submits a bona fide offer to purchase the business.

The purchaser should submit a comprehensive letter of intent, term sheet or indication of interest prior to commencing the due diligence process and receiving critical documents and information. The purchaser’s investigation and research typically focuses on the financial data and business tax returns, operational assets and inventory (if applicable), and legal and compliance matters related to the business.

The owner has the best possibility of maintaining the value of the business if the information is provided in a concise, comprehensive, and well-organized manner, and if the information provided is able to validate the purchaser’s initial offer. Down turns in the business’ performance during due diligence can be detrimental to any potential sale.

Preparation for Due Diligence

Sellers are often surprised by the sheer volume of information that they must provide during the due diligence process. The task of compiling the data and information needed for due diligence takes substantial time and effort. Therefore a prudent seller should begin to gather and organize this information when he or she decides to take the business to market, rather than waiting until a prospective purchaser submits a written offer. Advanced planning will keep the deal moving forward in an expeditious manner when a purchaser decides to propose an offer. Timing is a critical component to closing any deal.

The following is a non-exhaustive list of some of the important documents that will need to be provided during the due diligence process: federal tax returns, business financial statements, current seller’s discretionary earnings statement, management and employee records, business licenses or registrations, contracts or customer agreements, and any building leases. The seller should be prepared for complete transparency during the due diligence process.

It is important to note, that the due diligence process is a two-way street to a certain extent. A seller should investigate the purchaser’s financial capability, transferable management experience, and reputation. The purchaser should be able to provide proof of funds requisite to closing the deal (or the ability to qualify the appropriate amount of financing). The seller should also investigate the buyer’s previous professional experience through a comprehensive resume and an online search.

The goal of due diligence is for the purchaser to confirm the seller’s financial data, operational information and ultimately, agree on the sale price for the business. It truly does make or break the deal in many instances. The process can be lengthy and time consuming for both the seller and the purchaser. Therefore it is crucial for all parties involved (including the parties’ respective advisors and attorneys) to come fully prepared at the outset of the due diligence process. This will ensure an effective and efficient closing and reduce the natural stress and strain on the process.

About Sun Acquisitions

Sun Acquisitions is a Chicago based M&A firm that specializes in helping people confidentially buy and sell privately held firms. We have experience working with businesses across all industry sectors and sizes. Each member of our team is a certified business intermediary, equipped with the knowledge and proven method to sell your business successfully.

If you are interested in the sale of your business, contact us at (773) 243-1603 or marketing@sunacquisitions.com to get the conversation started today.

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