Due Diligence: Why it’s important

Many times I am asked by a client buying a business to review a contract and not make many changes. The client’s reasoning is the business terms are great and he/she wants to close quickly. While I can certainly appreciate the value of getting a good deal, the best way for a buyer to decide If that is truly the case is do his/her homework (a/k/a due diligence). Due diligence essentially means inspecting the business or assets of the business that one is buying. It can take multiple forms (e.g., reviewing the business’s financial records, physically inspecting the business’s assets, reviewing contracts, leases, governmental certificates, etc).

Due diligence is one of the most important steps, if not the most important step, in buying any business and should not be taken lightly. The reason being is not only is it important in terms of valuing whether or not the buyer is getting a good deal, it is important in helping to determine what steps are necessary in order to make the business transaction happen. For example, if the business is leasing space, does the lease require the landlord’s consent for the sale of the business or all or substantially all of its assets? If so, what is the threshold of the landlord’s consent (e.g., not to be unreasonably withheld) and how much time does a landlord have to make a decision? This is important because if consent is not obtained for one reason or another including time frame and the deal closes without such consent, it could be grounds for eviction. If that happens, the buyer has just bought a business that may no longer have a location. Even if the buyer is able to find new space if the rent is higher or the location is not as ideal, the business may not be as valuable as it was when the buyer purchased it.

The next logical question is how long should the period to conduct such diligence be (hereinafter the “Due Diligence Period”)? It depends because every deal is different. However, factors that should be considered are the type of business, the amount of money involved, the type of financing (if any) that the buyer is getting, the amount of governmental regulation (if any) on the business, etc. This is not to say that a deal should be drawn out so that every little detail about the business will be known prior to the transaction, as that is both impractical and illogical. Rather it just means that one should do as much homework as they can about a business and having ample time to do so will make that possible. For a better idea of what that time frame should be you should speak to an attorney who has experience in representing clients in business transactions such as the type of business you are purchasing or selling.

*The information in this blog posting is for general information purposes only. Nothing in this blog or associated pages, documents, comments, answers, emails, or other communications should be taken as legal advice for any individual case or situation. The information in this blog is not intended to create, and receipt or viewing of this information does not constitute, an attorney-client relationship.

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