Q: What is due diligence, and why does it matter in a business sale?
A: Due diligence is the buyer’s chance to verify what it’s buying before money changes hands. The process confirms that the business’s financials, contracts, and legal standing match what’s been represented. It uncovers problems that could affect price, terms, or whether the deal should proceed at all. For sellers, understanding the process is the best way to avoid surprises that may give a buyer leverage to renegotiate.
Q: What does the buyer’s attorney dig into?
A: Everything that touches the business, including financial statements and tax returns, material contracts, corporate records, employment matters, intellectual property, insurance coverage, pending or threatened litigation, and regulatory compliance. If data such as customer information or employee records is retained, expect a close look at what’s collected and how it’s protected. If real estate is involved, expect environmental and title review as well.
Q: How long does due diligence take once a letter of intent is signed?
A: Most deals run 90 to 120 days from the letter of intent to closing, with due diligence running in parallel to negotiation of the purchase agreement. The scope and pace depend on the size of the business and how the deal is structured. Asset purchase, stock purchase, and merger transactions each call for a different level of review.
Q: What should a seller do before a buyer starts asking questions?
A: Get organized. Pull together contracts, corporate books, financials, and intellectual property records before they’re requested. Review noncompete, assignment, and change of control clauses in key agreements. A contract that can’t be assigned, or a clause that blocks the sale outright, should surface early in the process, not the week before closing.
Q: What’s the single biggest mistake sellers make during this process?
A: Treating due diligence as something to survive rather than something to prepare for. A slow, incomplete, or evasive response to a buyer’s request reads as a red flag, even when nothing is wrong. Being organized, responsive, and upfront about known issues keeps the deal, and the price, on track.
Q: How does due diligence impact the deal?
A: Everything uncovered during the review should be reflected in the purchase agreement, including the representations and warranties, the disclosure schedules, and any indemnification terms. This is where an attorney’s involvement matters most. Findings from due diligence directly shape who bears the risk of an undisclosed problem after closing.
Due diligence is often where deals succeed or fall apart. Buyers use it to confirm what they’re paying for. Sellers who prepare for it keep leverage at the table and move faster to closing. Engage an experienced attorney before due diligence starts, not after the first request lands in your inbox.