A due diligence roadmap is a great way to ensure the process goes smoothly without setbacks. More importantly, the buyer can ensure they conduct a thorough due diligence process that allows them to feel completely confident in their purchase.
Keep in mind, this information comes directly from our own, proprietary due diligence roadmap. We have given a general overview of the steps, but a due diligence roadmap should be far more extensive (as ours is). Feel free to review the information below and contact us for more information about our due diligence roadmap (for both buyers and sellers).
What is Due Diligence?
Due diligence is the process in a business acquisition where the buyer has the opportunity to review and audit the company that they have agreed to purchase. This occurs after both sides agree to a purchase deal and the buyer signs a letter of intent (LOI).
What Steps Are Involved in The Due Diligence Roadmap?
There are a range of steps that are included in a due diligence roadmap.Below is a review of the various steps involved in the due diligence roadmap. Keep in mind, the order in which these due diligence tasks are completed can vary to a large extent, based on the buyer’s (and seller’s) preferences.
Letter of Intent (LOI)
The letter of intent (LOI) is a document that establishes the terms of the purchase and the intent of the buyer to purchase the company. The LOI launches the due diligence process; due diligence does not begin until the buyer has signed the document. Once the buyer receives the letter of intent, they can then review it and sign the document before submitting it to their broker, who will then present the LOI to the seller.
Also, both sides (the seller and the buyer) usually meet during this first stage. They may establish regular dates for due diligence meetings between the two sides. Of course, the broker should be there to guide this process and help ensure everything is put in place for a successful due diligence experience.
Financial Due Diligence
For financial due diligence, the seller will need to provide the buyer with a range of documents that allows them to properly assess the company’s financial performance. Ideally, the numbers should line up with what was presented to the buyer during the offers and negotiations stages. Notably, the documents the seller should provide include (but may not be limited to):
- Federal tax returns (3+ years)
- Profit and loss (P&L) statements (3+ years)
- Balance sheets (3+ years)
- W-2 forms (3+ years)
- Customer sales info (3+ years)
- Furniture, fixtures, and equipment (FFE) list
- Complete inventory list
Of course, this is not an exhaustive list. Your broker should be able to provide a more comprehensive financial due diligence checklist for the seller. After review of all financial information, the buyer will confirm that the financial due diligence process is complete and both sides move to operational due diligence (see below).
Operational Due Diligence
There are operational documents that the seller must provide, in addition to the financial documents discussed above. Specifically, the seller must provide their corporate documents, such as articles of incorporation, corporate bylaws, and shareholder’s agreements. The actual list should look different for every company. Additional documents that may be necessary during the operational due diligence stage of the roadmap are:
- Customer contracts and agreements
- Supplier/vendor contracts and agreements
- Software uses and licenses
- Employee contracts and agreements
- A copy of all insurance policies
- List of litigation history (prior, current, and pending)
- Employee benefits programs and agreements
The buyer should also request a list of all additional accounts, agreements, and contracts that are included in the sale. The seller should be thorough and explain the details of each document (if necessary). For instance, if there is a customer who has stated their intention to not renew their contract, then this should be stated during operational due diligence.
Financing
Financing is the next thing to work out during the due diligence roadmap. This is a stage where the buyer is doing the majority of the work. Of course, if the buyer is not financing the deal and is instead paying in full upon closing, then it is a relatively simple process. However, for financed deals, the buyer may need to submit an SBA loan application and provide a range of documents to the lender, seller,and business broker. A third-party valuation may be necessary as a part of the financing process as well.
Purchase Agreement and Legal
During this stage, the purchase agreement (PA) is drafted and circulated among all relevant parties (the buyer, seller, and their respective teams). The buyer and seller counsels will review the purchase agreement, discuss the details, and ultimately finalize it. The PA exhibits and ancillary documents are also drafted, circulated, reviewed, and finalized. Once all legal documents are finalized and reviewed and approved by the lender, both sides can move to the next stage in the process.
Lease
This stage is necessary if the seller is providing a leased building as a part of the transaction. In this case, the buyer will take over the existing leave or will negotiate a new lease with the landlord. The steps involved with the lease stage of the due diligence roadmap usually include contacting the landlord to review transfer instructions, submitting the required documents (to the landlord), and reviewing and revising any new lease agreements. Once the final lease agreement is approved, then this stage in the due diligence roadmap is complete.
Insurance
All insurance carriers need to be notified about the imminent sale. The buyer should first confirm what policies the current owner has (and who the provider is for each policy). In general, buyers will need to learn more about the company’s general liability, auto, health, and worker’s compensation insurance. Additional policies may be needed to purchase depending on the nature of the company’s operations, local laws, etc.
Licenses and Permits
The buyer will likely also have obligations as it pertains to licenses and permits. For instance, they may need to apply for state sales and tax use permits and make other necessary arrangements.
Account Transfers and Arrangements
You will need to ensure all accounts are set up properly to avoid mistakes such as missed payroll. Therefore, payroll services should be reviewed and set up properly to prepare for the transition. A transfer plan should be included for all accounts; the buyer may also need to set up a merchant account service. In some cases, a new bank account may need to be opened by the buyer as well.
Closing Details
Much of the work has been done when it comes time to close the sale. However, there are still a few tasks that likely need to be completed, not the least of which is to wire funds into escrow the day before closing. Settlement statements also need to be reviewed and approved, along with executing the ancillary documents.
Post-Closing Items
After closing, the seller will need to introduce the buyer to all employees, vendors, customers, etc. The seller will also need to transfer all remaining accounts that have not yet been transferred. After this, the two parties can continue with business operations. The extent to which the seller is involved in training and transition should be worked out by this point.
The Benefits of a Due Diligence Roadmap
As you have noticed by now, there are many steps involved with a due diligence roadmap. In fact, for many business sales, there are more than 100 tasks to complete. Needless to say, without a due diligence roadmap you can trust, the process can become disorganized and chaotic. Below, we take a closer look at the benefits of a due diligence roadmap.
Gives The Buyer Confidence in The Process
A due diligence roadmap gives buyers confidence that they have thoroughly vetted the company and investigated all aspects of the sale. This verification provides peace of mind as they know there are no hidden issues that can show up after the sale is complete and compromise their investment.
The Ability to Verify The Problems The Company Has
The goal of a business purchase is not to find the perfect company, but rather find a company with problems that the buyer can fix. A due diligence roadmap allows the buyer to verify the issues the company has (along with identifying any additional problems they were previously not aware existed). This allows them to plan accordingly and better project the value of the company after the problems are resolved.
The Buyer Receives Assurance They Are Buying The Company at Ideal Value
Buyers can help ensure they pay the appropriate value for the company by confirming the details of the company (financial, operational, legal, etc.) during the due diligence stage. In other words, a roadmap helps the buyer verify the sale price and gives them confidence as they know they are receiving it for a fair price.
Provides Clarity to an Otherwise Convoluted Process
With a due diligence roadmap, the buyer has clarity as to what they need to do during due diligence. This clarity helps the buyer prepare and know what to expect every step of the way, which can help setbacks and unnecessary stress. The fact is there are many complex steps in the process. All too often a convoluted process creates a scenario where the buyer is waiting around for certified public accountants (CPAs) and attorneys to inform them of the next steps. With a due diligence roadmap from a reputable business broker, however, this is not the case, and buyers can expect far more clarity during the due diligence process.
Gives The Seller Confidence That the Buyer Will Do a Good Job
The seller has likely poured countless hours and significant financial investment into building their company. In some ways, it is like their child. Needless to say, there are a lot of emotions that sellers often experience throughout the sale process. In many cases, there is nothing a seller appreciates more than seeing the buyer put the time and effort into seeing the full value of the company. Consequently, a due diligence roadmap can help the seller feel more confident that the buyer will take the business as it is and continually grow it.
Why is a Due Diligence Roadmap and Timeline Important? 
A due diligence roadmap and timeline allow the buyer to engage with a seller when they are ready to buy. With an established due diligence roadmap and timeline, you can systematically and meticulously go through each step of the process in an efficient in thorough manner. Otherwise, processes often take far longer than they should, and you risk neglecting important steps that are necessary to verify the quality of the purchase during due diligence.
Professional Tip: Focus on Accountability With Weekly Meetings
Lastly, we recommend weekly cadence calls between the buyer and the seller; the broker(s) should also join the call as well. The purpose of the cadence calls is to discuss the important aspects of due diligence and update each party on where things currently stand.
It also includes a discussion of what steps are next and what each party should do next to help move due diligence along quickly. For instance, the buyer may provide an update as to the documents they still need to review. Just as businesses have weekly meetings to discuss the specifics of business operations, the buyer and seller should also conduct regular calls to ensure due diligence is conducted in a proper manner.
Did You Enjoy This Article? Learn More About Our Due Diligence Roadmap
Sigma Mergers and Acquisitions uses a proprietary due diligence roadmap template that helps ensure a diligent due diligence process that moves along quickly and allows you to close the sale sooner (and with more confidence). We encourage you to reach out to us today if you are a buyer (or seller) in need of assistance with due diligence or the mergers and acquisitions process overall.
