by Rachel Fields
Due diligence is the process by which a potential buyer checks out everything about your business to find out as much as possible about what he or she is getting into before the deal is closed. You will need to give the buyer access to a wide range of information. If you are aware of problems with your business, you need to disclose them. This will protect you from a lawsuit for fraud, if the buyer discovers the problem after the purchase is complete. It is also preferable to having the buyer discover the problem before the deal is closed. If that happens, the buyer will wonder what else you may be hiding and it could kill the deal.
What types of information will the purchaser want? The answer is "just about everything". The buyer will probably want to see your operation first hand. He or she will also want to go over a lot of documents. These include business licenses, insurance policies, leases, employment agreements, employee benefits, financial reports, customer lists, and just about any other report or record that exists. In addition to documents, the purchaser will want you to provide information about any pending or threatened lawsuits, any insurance claims that have been filed, any tax problems or audits, and any other potential liability of which you are aware.
If you are aware of any potential problems that will not show up on the documents and records you provide, it is probably best to disclose those as well. For example, if you know you will need to upgrade a significant portion of your equipment in order to keep pace with competitors, you should disclose this information. You don't have to describe the worst-case scenario, just give the facts. You can also present possible solutions to any potential problems.
You want the new business owner to continue the success of the business. You may be counting on continuing payments from the new owner if it is an installment sale. You also might become a consultant to or employee of the business after the sale. This will provide you with continuing income – if the business continues to make money. The chances of this are greater if the buyer doesn't get any nasty surprises after the sale is closed. Finally, you want to be sure that the new owner will be able to pay any of your business debts that he or she assumes as part of the deal. Otherwise you may find that you are still liable for them.
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