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

By June 5, 2018 No Comments

This blog series explores the steps involved in buying and selling a business, which tend to be much more complex than many business owners realize. In my previous three blog posts, I explained how due diligence comes into play, and the nature of due diligence requests related to the structure of the business entity that is selling its assets and to financial information. In this post, I will discuss a key component of any purchase and sale transaction – customers.

Customers make a business profitable. A savvy purchaser will likely want to find out as much information as possible about the seller’s customers. This information will prove helpful in confirming the business’s value and also in ensuring that appropriate steps are taken to keep those customers happy during the ownership transition.

Initially, the purchaser, as part of the due diligence process, may request copies of all contracts with the seller’s customers. The purchaser will want to see whether those contracts can be assigned, meaning transferred, over to the purchaser at closing. Although some business owners assume the contracts automatically “go with the business,” in reality, legal documentation is generally required to assign the contracts. Additionally, the purchaser will want to examine the contractual agreements to ensure that the purchaser wants those contracts to be assigned. It may be that the contracts are not well written, or are not feasible from a business perspective.

The purchaser may also ask the seller for a list of the top customers for a recent period, such as the previous fiscal year. The list might include the total amount of revenue received from each customer and the customer’s contact information. And, to be cautious, a purchaser may also ask for a description of all customer complaints for a specified period. Not every unhappy customer goes on Yelp to voice their concerns. Many customers go directly to the company. The purchaser may want to know if that has happened, the substance of any complaints, and whether the seller addressed the complaints to the customer’s satisfaction.

Finally, is the seller’s work under some type of guaranty or warranty? If so, as part of due diligence, the purchaser will want to examine those guaranties or warranties and find out information about the nature and extent of customers’ pursuit of claims related to those promises.

My next blog post will continue to discuss the elements of due diligence, a key component in the purchase and sale of a business.

Photo credit: Andres Rodriguez on Flickr

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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