Due diligence is one of the most important tasks you’ll take on when buying a business. Through the process, you’ll study the business’s financial documents, policies, and processes and learn how the business operates, generates cash, handles expenses, and manages inventory. You’ll also learn about the internal challenges and the external problems it’s encountered through competition, legal concerns, or regulatory changes.
Based on what you learn, you can decide whether you want to proceed with the purchase, change the terms of your initial agreement, or pull out of the sale.
But, sometimes, new problems can emerge through the due diligence process, making a deal seem less favorable.
You may find discrepancies between the preliminary information you received about the business and what should have been reported in its financials.
You may arrive at different valuations for the inventory, real estate, or equipment than the seller claimed.
Or, you may uncover pending legal issues, claims against the business, or other concerns that could impact the business’s financial health and capacity.
The issues you find give you grounds to adjust your offer price or walk away from the purchase.
|It’s a good practice to ask questions about discrepancies as they emerge to allow sellers an opportunity to explain them or provide information that’ll help you understand their perspective. Many are first-time sellers who may be unaware of the missteps they’ve made; when possible, avoid accusing them of misleading you. Instead, give them an opportunity to clarify, seek answers from their accountant, and provide you with the information you need to form a complete assessment of the business.|
How can I use what I learn to renegotiate with the seller?
As long as you avoided binding language, your LOI was a nonbinding offer, which means you can’t be bound to the terms, conditions, or pricing you proposed. Here's why that's important: You can change your offer to reflect what you know now. You can also pull it back entirely.
If you uncover problems and still plan to proceed with the purchase, you'll need to decide whether the problems you find are significant enough to propose an adjusted offer price. If they are, you and your attorney should document your concerns and indicate how they’ll affect your offer price. Then, your attorney can provide a new, adjusted offer to the seller and renegotiate the purchase.
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How will the seller respond?
It’s very common for sellers to respond unfavorably to adjustments to buyers’ original offers. However, if you’ve talked through your points of concern throughout the process, the seller will likely be ready for this discussion.
|When raising concerns—especially concerns that’ll affect your offer price—make sure your points are fair and verifiable. Try to present them in ways that won’t feel like a personal attack to the seller.|
Keep in mind that the seller could counter or hold firm to your original offer. If this occurs, avoid responding in the moment. Take time to consider the offer to decide if the business will be a smart investment under the seller’s terms.
If you decide to proceed, your attorney can draft a sales agreement that’ll bind you and the seller to the transfer of the business. You can read more about this agreement here:
Once you and the seller arrive at an agreement, you can secure the capital you need to buy the business. You can learn more about this step in this guide:
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