PICTURE THIS SCENARIO:
An investor approaches a business owner with an attractive offer to buy the business. There is an initial meeting and general deal points are discussed. A rough outline of the terms is sketched out on the proverbial napkin and the parties shake hands leaving the owner thinking they have a deal subject only to a few details to be worked out.
Then the investor starts with due diligence. It begins with a few questions trickling in. Then the first round of answers leads to new questions, and the trickle turns into a stream, and then a torrent. Spending so much time responding to questions diverts the company management away from its primary responsibilities. The investor becomes frustrated with the delayed responses and with the incomplete or contradictory information. The owner is frustrated by the amount of time and effort that is being used and may perceive the questions as signaling lack of trust or commitment from the buyer.
If the buyer is serious and likes the responses to the initial questions, then a team of advisors, including lawyers, CPAs and auditors, may come in for an even more comprehensive set of demands for information. The company undergoes even greater stress, and tensions increase. Under these circumstances, it is not unusual for negotiations to break down, and what could have been a good deal turns into no deal at all.
AFTER THE PROVISIONAL OFFER
Most due diligence is done after a potential buyer makes a provisional offer. The due diligence process then begins, often with a very short timeframe for the seller to respond.
A COMPLEX TRANSACTION
Selling a business involves a potentially complex transaction or series of related transactions. Unlike the sale of say, commercial real estate, selling a business involves significantly greater advance planning and hard work ahead of time for the seller. In the next series of posts, we’ll discuss some steps that sellers can take beforehand to make the due diligence process a little easier to navigate.