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Home > Tools and Resources > Ask the Expert > Additional Due Diligence Issues When Buying A Business

Additional Due Diligence Issues When Buying A Business

By Richard Parker | Diomo Corporation
Contact Richard Parker | Visit Website | About The Author

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There are a number of common concerns for prospective business buyers which also impact the seller and often times it takes a creative approach by both sides in a deal to address these mutual, yet conflicting concerns. These are conditions to the overall deal which may have to be addressed at the very end of the formal due diligence period and may only be finalized once all other contingencies to the deal have been met.

Buyers and sellers often have the same fears but from opposite perspectives as it relates to employees, customers, suppliers and the landlord.

It is important for a buyer to understand that nearly every seller is deeply concerned about retaining confidentiality about the business even being for sale and they typically fear dire consequences if word gets out to anyone.

Employees:

Realistically, it is very rare that any employees will leave, especially in this market, but even more so from the perspective that a new owner likely needs the employees more than the seller does. Nevertheless, it is a legitimate fear by the seller. To this end, a buyer should not over-engineer the roles of all of the employees and instead focus upon the ones who in fact can be considered critical to the business. If there are any who absolutely must remain on board post-sale, then the buyer and seller have to set a timeline where the buyer will be able to confirm with those employees that they will stay on board. Keeping a sellers concerns in mind, this may be one of the last conditions to the deal after all others have been satisfied.

Suppliers:

Although most often the business vendors will want to sell their wares to the new owner as long as the business under new ownership pays its bills, a buyer has to be sure of this and especially so in those businesses where a relationship may involved certain preferential terms or exclusivity. The seller must inform the suppliers accordingly, and the buyer will need to validate that the relationship will continue, but again, this may only get done after the buyer has signed off on all of the financial conditions of the sale for example.

Landlords:

Insofar as the lease is concerned, in general, a landlord has only one objective: to be sure their tenant pays the rent on time. Standard leases will include language regarding transfers and so a buyer needs to investigate these terms and also include the assignment under terms similar in scope to the current lease. If a new lease needs to be drawn up, then clearly it must on terms agreeable to the buyer.

Customers:

The same holds true as it relates to customers of the business for sale. Unless the seller has specific knowledge that cannot translate to a new owner, in most cases the customers will continue to buy, at least until the new owner gives them reason not to. However, if there are a limited number of clients who represent the bulk of the companys business, the buyer needs assurances that these relationships will continue. It may necessitate an earnout type deal structure, or, where appropriate, a meeting between the buyer and these customers. This can be a very sensitive issue and therefore a buyer must be willing to work with the seller and not put the business in peril if they do not go through with the deal.

Keep In Mind:

While there is no guarantee that employees, customers or suppliers will continue or that the landlord will extend new lease terms, the risks of these impacts both parties in a deal. As such, it is imperative that the parties work together to address their individual concerns while at the same time being open-minded and sensitive to the other partys perspective. Proceed with maturity and never draw a line in the sand regarding these deal components. There is always a resolution if both sides are reasonable. There is risk in every deal and a business will only sell when the two sides can live with the level of risk they will inherit after closing. Despite this, the risks can be drastically reduced when both sides take a mature approach to dealing with these matters and by a take t or leave it attitude. In other words, look for every possible solution before you ever draw a line in the side and declare something a deal-breaker.

Have a great week!

Get more expert advice in Richard Parker's How To Buy A Good Business At A Great Price - the most widely used reference resource and strategy guide for buying a business.

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About The Author
Richard Parker is the author of: How To Buy A Good Business At A Great Price, the most widely used reference resource and strategy guide for buying a business. He has purchased ten businesses in his career and has helped thousands of prospective buyers worldwide learn how to buy the right business for sale. He is also founder and President of Diomo Corporation - The Business Buyer Resource Center.

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