Due Diligence and the timing of inspections

It is natural for a buyer to assume they have to ask all their questions and be 100% confident they want to buy the business, before they write their offer. They may also feel they have to do all of their due diligence inspections before writing the offer. I educate buyers to rely on the seller's representations during their initial investigation, and that if they are interested in writing an offer, once their offer is accepted, they will have a due diligence period to conduct as thorough review of the business as they want.

I feel it’s important for both buyer and seller not to conduct a full due diligence inspection before an offer is written. Typically a buyer is going to rely on a multiple gross sales, gross profit, net income, assets, or inventory to determine the value of the business to them. Therefore, it’s best for a buyer to present their offer before time is invested doing a full investigation. If the details aren’t proved during their inspection, they can always make adjustments to the purchase agreement, or cancel the purchase. This is especially important with business sales since there are so many terms involved with an offer. It is not only about purchase price. How much money is someone putting down, do they need seller financing, what is the time frame proposed for due diligence inspection, how much inventory is the buyer expecting to be passed along with the purchase, does the buyer agree to the lease terms and will they receive landlord approval, when do they propose to close the purchase, how much training do they want. So, it’s much more than just purchase price.

It's also important for a buyer to know, the way we handle the process, we will hold their deposit check uncashed during the due diligence inspection. If they don't like their findings, they let me know and I return their check. If they do approve of the inspection, we then open escrow, and the deposit check is sent to the escrow company for them to deposit.

This process is similar to when someone purchases a house. They don’t do their investigations first. They stop by the house a few times, asks the sellers some questions, then write their offer. Once the offer is accepted, they do their inspection. Do they need to do further inspection of the soil, air conditioning system, pool, roof, etc? They conduct these inspections after the offer is accepted.

It is ultimately up to the buyer and seller how much time they want to invest before agreeing to purchase terms. I always recommend to my clients that it’s best to see if there is a meeting of the minds on terms before they invest more time, effort, and perhaps money to do all of their investigations, and ultimately find out they can’t agree on terms. Also, can the seller afford to invest this amount of time and effort with all prospects (20, 30, 50 prospects?) while still trying to run their successful business?

Sellers can and should invest all the time they need with that one buyer who has shown their interest and intent by presenting a written offer. And that seller will save time by not doing all this work with all buyer inquiries, once they’ve accepted an offer.