Always insist that all responses to your requests for information be sent to you in writing, dated and signed.
If the seller or the Business Broker tells you that they do not have the time to get you the due diligence information then walk away from the deal. On the other hand, it is important to remember that the seller is still involved in the day-to-day operation of the business, and his time is limited and valuable. It is important that you make as few individual requests for information as possible. It is more than likely that you will require more than one request, as the information from the first request will probably lead to additional questions and clarifications.
Always remember that the only "stupid" question is the question that wasn’t asked!
A common ploy used by sellers and Business Brokers to avoid giving you all the information that you request in order to perform the due diligence exercise is to moan and groan each and every time that you request something. The intent is try to intimidate you into feeling stupid and guilty that you are asking for information and the seller hopes that it will curtail your requests. Do not fall for it! The current owner wants to sell and that places the responsibility directly on him to respond to all your questions and provide you with any and all the information that you request.
In my estimation one of the key areas of due diligence which is most often neglected is “why does the current owner want to sell”?
Why someone is considering selling their business may be one of the most important things to understand and accept prior to making a firm offer. You should never buy a business if the explanation on why it is being sold makes little or no sense to you what so ever. If you can honestly sit back, after reviewing the business and the due diligence information and say “I don’t understand why he or she is selling the business”, I respectfully suggest that you have missed something!
A situation where someone “shows” you that they made a profit of $1M last year, that the reason that they are selling is that they are tired of working seven days a week, a 20 hours a day, and would be pleased to take back an employment contract for a number of years, initially sounds like an opportunity that can’t be passed up, but it really should raise all sorts of red flags. If the company truly made a $1M profit why not hire additional staff that will take a lot of the day to day work load burden away. As the seller is willing to take back a long-term employment contract he is obviously not prepared to retire and it also signifies that he does not have other business interests that require a substantial portion of his time.
Lets present a scenario where by the seller is the salesman, the accountant and the senior engineer of the company that is up for sale. He can hire a sales coordinator to help in sales. He can hire a controller and bookkeeper to deal with the finances and a senior engineer to perform the design and development work. This would leave him with part of the sales responsibilities.
The math looks like this:
Last Year's Profit |
$ 1,000,000 |
The question remains, why is he selling? If anything the base profit, before the new employee expense, should increase because the seller can now devote 100% of his time to sales rather than splitting his time amongst four other duties. Profit should also increase because the seller now has someone full time, 100% committed to doing the design and development work for the company. I personally would find a situation such as this extremely suspicious.