Due diligence and closing

Due diligence is just a fancy way of saying:

• What have you told me that isn't true?
• What haven't you told me that I need to know?
• What don't you know that I should know?

Due diligence represents the awkward phase between soaring seller optimism upon initial agreements and muted buyer skepticism upon investigating details. Structuring this exploratory process effectively smoothes negotiations toward a definitive purchase agreement and closing.

Length and inherent difficulties

The due diligence phase stretches anywhere from 4 months for exceptionally large or complex companies to 6 to 12 weeks for smaller firms. Standard challenges include:

• Disorganized financial records and organizational obstacles delaying information access
• Data gaps requiring compiling fragmented information sources
• Resistance, distraction, or limited bandwidth from seller personnel
• Mounting tensions between buyer and seller representatives as questions probe sensitivities

The most skilled acquirers thoughtfully probe the business rather than mandate exhaustive proctology exams across every detail. They focus on material risks around misstated earnings, problematic customer contracts, cultural mismatches between management teams, and faulty representations.

Setting appropriate expectations

Before granting exclusivity rights to enable due diligence, ask buyers about their:

• Customary diligence philosophy, duration, and deal killer risks
• Use of third-party accounting, technology, or environmental experts
• Division of responsibilities between lawyers, accountants, and operating team members

Letter of intent

After the negotiation is complete, the buyer will have a letter of intent drafted for both parties to sign.

A letter of intent (LOI) is a promise to agree to transact on the terms specified if the facts check out. It specifies a period of exclusivity, typically between 60 and 120 days, and obligates the seller to provide the information requested.

The other specific sections will include:

• Price
• Type of sale (stock vs. asset)
• Where money is coming from and how it will be used (sources and uses)
• Most material terms of the sale
• What needs to be resolved before a transaction can take place
• Due diligence timeline and general steps

Pro tip: Involve your lawyer right before you sign the LOI.

This is the stage in the process where you should involve a lawyer. You should not involve them until right before you sign an LOI (or you may rack up a lot of unnecessary expenses). You should have at least one lawyer who has some M&A transaction experience. It is not a good idea to bring in your personal attorney, real estate attorney, divorce attorney, etc., to advise you.

Best practices for communication, after the LOI

Once officially under a letter of intent, success hinges on the following:

• Establishing weekly working meetings rotating through functional topics from finance to products over 60-90 minutes
• Calmly and promptly addressing detailed buyer inquiries, rather than evasiveness
• Buyer transparently raising potential deal-breaker level concerns early rather than last-minute surprises
• Both parties identify key negotiation points around contingent liabilities, fundamental operations unknowns, and personnel decisions requiring alignment