Step 5: Conduct Due Diligence & Closing
Due diligence is when buyers verify everything you've told them. Structure this exploratory process effectively to smooth negotiations toward a definitive purchase agreement and closing.
Due diligence is when buyers verify everything you've told them. It's basically a fancy way of asking:
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 initiating the agreement optimism and buyer skepticism upon investigating details. Structuring this exploratory process effectively smoothes negotiations toward a definitive purchase agreement and closing. If you prepared your documentation properly, this phase will go much smoother.
How Long Does Due Diligence Take?
6-12 weeks
for smaller firms
4+ months
for large/complex companies
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
Smart acquirers focus on what matters:
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.
5 Things That Kill Business Deals in Due Diligence
Understanding why deals collapse helps you avoid common pitfalls:
Financial surprises
Revenue recognized incorrectly, expenses hidden in personal accounts, or EBITDA calculations that don't hold up under scrutiny. If your numbers are inflated or unclear, deals die.
Customer concentration
Discovering that 40% of revenue comes from one customer who's already shopping competitors. Buyers walk when they realize the business is more fragile than presented.
Legal issues
Unresolved lawsuits, IP disputes, unclear ownership, or compliance violations. These create liability concerns that buyers won't accept.
Seller behavior
Being evasive, defensive, or slow to provide information signals problems. Buyers interpret delays as hiding something.
Unrealistic expectations
Sellers who won't budge on price despite evidence suggesting lower valuation, or who add new demands late in the process.
How to Set Expectations Before Due Diligence
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
What Is a Letter of Intent (LOI) in a Business Sale?
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:
| Section | Description |
|---|---|
| Price | Total consideration and how it's calculated |
| Type of Sale | Stock vs. asset sale and implications for each party |
| Sources & Uses | Where money is coming from and how it will be used |
| Material Terms | Most significant terms affecting the transaction |
| Contingencies | What needs to be resolved before a transaction can take place |
| Due Diligence Timeline | General steps and expected duration |
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.
Communication Best Practices After Signing 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
How to Close on a Business Sale
Once due diligence is complete and any issues are resolved, you'll move to closing. This involves finalizing the purchase agreement and executing the transaction. After closing, you'll need to navigate the post-sale transition.
Purchase Agreement Negotiation
Your M&A attorney will negotiate the definitive purchase agreement. Key areas include representations and warranties, indemnification, non-compete terms, and post-closing adjustments.
Pre-Closing Checklist
Complete required consents, lender payoffs, employee notifications, and regulatory filings. Prepare for transition of bank accounts, systems, and contracts.
Signing and Funding
Documents are executed, funds are transferred, and ownership changes hands. Often uses an escrow agent for complex transactions.
Celebrate closing!
Closing day can be anticlimactic after months of work, or it can be chaotic with last-minute issues. Either way, celebrate. You've accomplished something significant.
Frequently Asked Questions
How long does due diligence take?
Due diligence typically takes 6-12 weeks for smaller firms and up to 4 months for larger or more complex companies. The timeline depends on how organized your records are and the complexity of your business.
What is a Letter of Intent (LOI)?
An LOI is a non-binding agreement that outlines the key terms of the deal before due diligence begins. It typically includes price, deal structure, exclusivity period (60-120 days), and major conditions to close.
What kills deals during due diligence?
Common deal-killers include financial surprises (inflated EBITDA, hidden expenses), high customer concentration, unresolved legal issues, seller behavior (being evasive or slow), and unrealistic price expectations.
When should I involve a lawyer in the sale?
Involve an M&A-experienced attorney right before signing the LOI. Engaging them too early can rack up unnecessary expenses. Avoid using personal, real estate, or divorce attorneys for business sales.
What do buyers look for during due diligence?
Buyers verify financial accuracy, review customer contracts, assess legal risks, evaluate employees, check for liabilities, and confirm that the business matches what was represented. They're essentially asking: what isn't true, what wasn't disclosed, and what risks exist?
What is an exclusivity period in a business sale?
An exclusivity (or "no-shop") period prevents you from talking to other buyers while one buyer conducts due diligence. It typically lasts 60-120 days. Granting exclusivity shows commitment but removes your negotiating leverage during that window.
How do I prepare for due diligence?
Organize all financial records, legal documents, customer contracts, employee information, and operational data in a virtual data room. The more organized you are, the faster and smoother due diligence goes. Delays signal problems to buyers.
What happens after due diligence is complete?
If due diligence is satisfactory, you move to negotiating and signing the definitive purchase agreement, completing any pre-closing requirements, and then closing (signing documents and transferring funds).
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