Due Diligence is the final hurdle of the business sale process. It is the time when the buyer requests from the seller any documents and materials needed to verify that all representations made by the seller are accurate and occurs after a purchase contract is signed by both parties in the transaction. The contract is contingent upon the business passing due diligence inspection by the buyer, which is usually scheduled to last about two weeks to a month, depending on the size and complexity of the enterprise.

While there are many aspects of the business that will be explored by the buyer, such as as personnel, operational, market, and legal, it is financial due diligence that is one of the biggest reasons deals fall apart. Having proper documentation to present to a prospective buyer that proves revenues and earnings of the business is key to attaining a successful sale in a timely manner. With good financial records a prospective buyer could readily verify earnings and be able to arrange bank financing, if applicable.

On the other hand, poor financial records would not yield such a rosy outcome. First, the buyer would most likely need additional time to verify and make sense of the information, which could delay closing and require the business owner to produce additional data. Secondly, if the buyer feels the books are unsatisfactory or inconsistent, a higher risk in purchasing the business would be perceived. Consequently, depending on the risk tolerance of the buyer, s/he would either pull out of the deal or offer a lower price than originally negotiated in the contract.

There are things that may be uncovered during due diligence of which the seller may or may not have been aware that could affect the transaction. In many cases, these issues can be worked out. Small issues usually involve some give and take from both parties and the transaction will stay on track. Major findings, however, could result in a dead deal or a deal that gets renegotiated.

Due diligence preparations should be made prior to the business sale process to avoid delays and facilitate a smooth experience for everyone involved. The more expeditiously that clear and organized information that demonstrates the full financial benefits of owning the business can be made available to a prospective buyer, the more likely the business will sell as negotiated and close on time. With that in mind, the following are individual items that may be requested by a prospective buyer in order to substantiate the financial aspects of the business.

  • Income statements
  • Balance Sheet
  • Assets on balance sheet
  • Tax returns
  • Texas Sales Tax and Franchise Tax up-to-date clearance (Certificate of No Tax Due)
  • Customer and / or vendor contracts
  • Bank statements
  • Documentation of the owner’s discretionary earnings
  • Inventory reports
  • Asset depreciation list
  • General ledgers
  • Insurance policies
  • Sales and backlog
  • Equipment leases
  • Accounts receivable and payables reports