Doing the Due Diligence

Guess what often increases in the fourth quarter of every year? Buying and selling of businesses. Guess what else can increase during a recession? Yup, buying and selling of businesses. The first trend is not a surprise. You can close at the end of the calendar year, which is also the end of many a company’s fiscal year.

But in a recession? Yup, we see a trend here too. Because some companies do really well during a recession (if you are selling PPE or do sanitation, you are kind of busy right now) so they have cash. On the other side, some companies are doing really poorly. Or maybe the owners just want out. Or they want to focus on their core industry and want to divest distractions. Whatever the reason, they want to get money in the door for something they don’t want to do anymore.

That means stock purchase agreements and asset purchase agreements are common sights in our inboxes right now. No matter which one, no matter the reason, one thing remains the same: The buyer needs to know what they are getting into. They want to see the skeletons in the closet. That’s called performing due diligence.

If you are planning on buying or selling, the sooner you get everything gathered for due diligence review, the better (and cheaper) it is for everyone. That means the seller should have these things ready:

  • Organizational documents (Articles, Bylaws or Operating Agreement, Resolutions, Permits)
  • Client lists and contracts
  • Vendor lists and contracts
  • Intellectual property documentation and deadlines (trademarks, patent, copyrights, trade secrets, licenses)
  • Employees and their benefits
  • Any debts, liens, and security interests

DO NOT take anything for granted. I cannot tell you how many times I have heard, “They don’t have any debts,” or “There are no liens,” but a UCC search tells the opposite. “Oh yeah! I forgot about that.” is a common theme.

Schedule in time (or budget for my time) to actually read those contracts. Yes, read them. Why? Because they can hold up the deal. One common issue is a provision that says the other side needs to approve of an assignment of the contract. There are even provisions that say if it is a stock sale, they get to approve or not. I have had more than a few deals get put on hold because a software company that licenses critical programs is holding their consent until they get more information. Oh, and if you are leasing your copier, you better double check for both the security interest and assignment provision. Really, truly.

All of this is to say (or maybe more honestly put, all of this is me begging you), sellers, to start putting this together right now. And buyers, start looking at them as soon as you can. Do not, pretty, pretty please, come to us three days before closing asking us to review hundreds to thousands of pages of contracts and get permission from SAP, the landlord, and the copier lessor, and the newly discovered silent partner. Our stomachs will not like that much caffeine, and you will not like that invoice.

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