Due Diligence is an integral part of the business transfer process and starts at the very beginning during the business valuation phase and continues until closing. When the due diligence time comes all major issues should have been discussed, resolved and agreed to in writing between the buyer and seller including the all important non-compete covenant. The biggest job at closing time is counting and adjusting inventory for businesses that have it. Inventory can be counted by the buyer and seller or by mutual signed agreement a professional inventory counting service such as RGIS.
All business are different and have many due diligence items and closing documents depending on the industry they are in. Here are but a few examples: non-compete, supplier, distribution, lease, security and warranty agreements, bill of sale, consultation/employment agreement, customer and client lists, licenses, corporate resolutions, UCC Financing statements, permits, inventory, asset list of furniture, fixtures, equipment, machinery vehicles. And in some industries, a Phase I or Phase II environmental assessment. All items being transferred as a part of the sale must be listed, priced and agreed to by signature from buyer and seller. Utilities, phones, digital services vehicle registrations etc., are transferred outside of closing by the seller and buyer on the day of closing. Any assets that must be paid off as a part of a transaction is done on the day of closing when the payoff amount is received from the lender. Things that need to be prorated like employee vacations, insurance premiums, lease payments etc. are prepared and handled on the day of closing.
Listed below are common contingencies found in many business transfers and examples of other contingencies that are specific in nature and are from actual transactions.
- Common Contingencies
- Accepting the books and records.
- Being able to obtain financing from a financial institution.
- Being able to assume or negotiate an acceptable lease with landlord.
- Acceptable method of handling the remaining warranties on products or services.
- Examples of Specific Contingencies
- ABC Corporation agrees to purchase the stock of DEF, Inc with the conditions that Mr. Smith enters into an employment agreement for a minimum of 5 years to maintain the ongoing business. Mr. Smith will become the Branch Manager for ABC in Arkansas. His salary will be increased to $$$,$$$ per year and be eligible for performance bonuses based on the profitability of the operations.
- Offer is based upon the test results from National Testing Laboratories, Ltd and the State of Arkansas granting an Operating License to Buyer.
- Offer is based on the Seller delivering the aircraft equipment to Oklahoma which has as exemption of sales tax on aircraft transactions over 2.5 million dollars.
- Prepaid Accounts/Equipment Deposits/Rental Charges: Prior to closing, a list of prepaid accounts, equipment deposits, and rental charges billed in advance but not earned will be compiled and acknowledged by mutual signature. The balance of same will be deducted from proceeds due Seller at closing.
Step Seven : The Closing (Ahhhh… The Finish Line)
Don and Carol Thanks to all of you at Northwest Arkansas Business Brokers for helping us facilitate this transaction. It will be a great addition to our other companies. Your work on the financials and the clarity of the marketing package made our due-diligence period much shorter. We give merit to your integrity, straight talk and marketing skills.
~S. Audrain & J. Smith (AVIATION INDUSTRY - GOVERNMENT SUPPORT FLYING SERVICE)
Don, Thanks for spending time with my accountant and having the foresight to prepare me for due diligence with the buyer. I thought I knew my business well and was amazed at the curveballs thrown. Even though the buyer was extremely analytical and took several hours and two meetings, you had me fully prepared for all questions that came up. I also had no idea what my business was worth and you have made my retirement dream come true. You hit this one out of the park! Thanks more than a million.
~L. Knox (DISTRIBUTION – ELECTRICAL WHOLESALE SUPPLY)
You are not only some of the nicest people I’ve ever met; your work is the best I’ve ever seen, no kidding! After 40 something years in the business and ready to retire, I spent more money than I care to mention with several companies trying unsuccessfully to sell my business. I was ready to close up shop and walk away. You got me a lot of money for my company and at a reasonable cost. The professional way you handled everything was great! Now I can retire fully satisfied. Thanks. By the way, I recommend you to everyone I hear about that wants to sell their business.
~M. Wilson, (CONSTRUCTION INDUSTRY - PLASTERING & SCAFFOLDING)