The Nitty-Gritty of a Business Purchase and Sale: Due Diligence, Part II

This blog series explores the steps in buying and selling a business, which tend to be much more complex than many business owners realize. In my last blog post,  I explained how due diligence comes into play. In this post, I will provide some examples of the types of information that the purchaser requests from the seller in the due diligence process. One reason why business sales fail to close is that, when it comes to due diligence, the seller is caught off guard and unprepared to provide the type of information that the buyer reasonably requests. The buyer, faced with delays and incomplete responses to the questions asked and documents requested, develops the impression that the business is not well-run and that what information is provided may not be reliable. The seller’s failure to prepare, ultimately, can cause the purchaser to call off the transaction.

If you intend to sell your business, it’s never too soon to work with a trained business advisor who can explain the due diligence process in great detail, and can assist you in being fully prepared to provide thorough, solid information that can assist in closing the deal. With that in mind, here are some items that typically are requested by the buyer in the due diligence process involving the underlying business entity:

  • The Seller’s Organizational and Structural Documents: If the seller has a corporation, the purchaser will request documentation including the Articles of Incorporation, Bylaws, minutes of all meetings of the shareholders and Board of Directors, a list of the Board of Directors and corporate officers, and a list of shareholders and the number of shares held. If the seller has a limited liability company (LLC), the purchaser will typically request the Certificate of Formation, Operating Agreement, minutes of all meetings of LLC members and/or managers, a list of all LLC members and, if there is a manager, the name and contact information of the manager, and the nature of the ownership interests held by the members. In other words, if all the seller has is the one page sheet from when she formed the business online with the Washington Secretary of State, a sophisticated buyer will be wary.
  • Capitalization. The purchaser will want to review the documents related to how the business is owned. For a corporation, this includes stock records and a description of when and to whom the shares were issued for each class of stock. If the shareholders have entered into a shareholder agreement governing the sale and transfer of stock, that document will likely be requested. If the corporation is publically held, due diligence will include the registration statements, security filings, and other related documents. For a limited liability company, the purchaser will want to review any agreements among the members governing the sale or transfer of LLC interests. Any agreements covering a right to purchase will also likely be requested.

This is just the beginning, however. Due diligence involves so much more than requesting the documents focused on the underlying business entity! My next blog post will explain other areas of investigation covered by the due diligence process.

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This post is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon in regard to any particular facts or circumstances without first consulting with an attorney.

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