Due Diligence Stage

Final Examination of the Company – Due Diligence Process

The Letter of Intent (LOI) is signed on the condition that the company being purchased successfully completes the due diligence process. The very posing of this question represents a fundamental shift in the balance of power towards the buyer. This is because the buyer has the right to decide whether or not your company passes this test. Since the buyers often pay for the due diligence, the sellers almost never have the right to see the conclusion of the verification (due diligence report). Sellers need to understand that the main task of due diligence is not only checking the conditions of the target company, but also a search for possible risks, which will be used in the final stages of negotiations to lower the price or change the deal structure. This is very important because at this stage of the process, sellers are already almost “dividing up their millions” agreed upon in the LOI while believing that the negotiations are completed, and that all outstanding questions can be easily answered. Many even believe that they should be as open as possible at this stage, thus showing that there is nothing to hide. This is a common mistake, however, and negative effects can occur very quickly.

In the beginning stages of the due diligence process, sellers have invested much more money into the process than the buyers. This makes sellers more vulnerable. For our clients, we always say that as long as the buyer has not spent significant funds to negotiate with you, they can always “walk out” of the deal painlessly. Therefore, the objective for the sellers is to get the buyers to invest as much money as possible into the due diligence process. This position is often counter-intuitive, but is the only proper strategy in the instance of selling a private company to a large corporation.

If the buyer does not hire independent legal counsel or an accounting firm to perform due diligence, the seller should be very concerned. Of course, every situation is somewhat unique, but if you are faced with the situation of a buyer deciding to perform the process themselves or with a little-known company, it is advisable that you discuss this situation with your bankers. This can be a very dangerous sign of gathering business intelligence that can have very unfortunate consequences.

In our store, you can buy a sample formal request, which is used in the final stages of the due diligence process. This document will provide a better understanding of how deeply the company is being audited, and if the international corporation is really interested in buying. Additionally, this document will help you better prepare for the due diligence.

Please feel free to contact us if you have additional questions about due diligence stage.  You can reach us by phone +12024137187 or by email.