Why it matters
Due diligence is how you find out whether the listing is true. It is also how lenders, investors and your advisers decide whether to back the deal. A seller who asks you to cut it short is asking you to take their word for the most important numbers in the purchase.
Pressure takes several forms: a deadline that arrives before the documents do, another buyer said to be ready to sign, a lower price for closing within days, a request for a non-refundable deposit, or an offer of stronger warranties in place of checks. Some urgency is genuine. A seller with a health problem, or a broker with several interested parties, may have good reason to move quickly. The test is whether they will still let you check what matters in a shorter time, rather than not at all.
Warranties and indemnities do not replace diligence. They give you a claim after the event, against a seller who may have spent the money, moved abroad or closed the company that sold. Their value depends on the seller's ability to pay, which is why escrow or a holdback often sits alongside them.
If a seller will not allow a reasonable diligence period, walking away is usually cheaper than finding out later. Where time really is short, desk research on the listing and public records can start before the seller opens the data room, so the diligence window is spent on what only the seller can show you. What's in a dossier describes what that kind of research covers.
Due diligence is the investigation a buyer carries out before committing to a purchase, testing the finances, contracts, legal position and operations against what the seller has described.
Warranties are the seller's statements of fact about a business in the purchase agreement; indemnities are promises to reimburse specific losses. Together they decide who bears risks that diligence could not rule out.
A business broker markets businesses for sale and manages the process on the seller's behalf. The broker is usually paid by the seller, mostly when a deal completes.
How to spot it
- Deadlines fall before you have received the documents needed to meet them.
- You hear about other buyers, but nothing about who they are or how far along they are.
- The seller asks for a non-refundable deposit before diligence begins.
- Requests to speak to the accountant, visit the premises or meet key staff keep being postponed.
- The draft letter of intent (heads of terms in the UK) offers little or no exclusivity, or a diligence period too short for the checks you need.
- The seller or broker suggests your adviser or lender is being too cautious.
- The price drops sharply if you agree to complete quickly.
A letter of intent sets out the main terms on which a buyer proposes to acquire a business, before due diligence and the full purchase agreement. In the UK the equivalent is usually heads of terms.
Heads of terms is the UK name for a short document recording the main commercial terms of a deal before the legal documents are drafted. It is the equivalent of a US letter of intent.
An exclusivity period is an agreed time during which the seller will not negotiate with other buyers, giving you room to complete due diligence and arrange finance.
Questions to ask the seller
- What is driving the timetable, and what happens if it slips by a few weeks?
- Which documents can you provide this week so diligence can start now?
- Can we agree a written diligence timetable with dates for each stage?
- Will you agree an exclusivity period long enough for the checks to be completed?
- Would you accept part of the price in escrow or as a holdback until key points are confirmed?
- Are you in talks with other buyers, and what stage have they reached?
Documents to request
- A written diligence timetable agreed by both sides and referenced in the letter of intent
- A data room index showing which documents exist and when each will be uploaded
- The draft sale agreement, including warranties, indemnities and any limits on claims
- Written deposit terms, including when a deposit is refundable
- Contact details for the seller's accountant, with permission for them to answer your questions
- Any deadlines or conditions set by the seller's own lender or landlord that explain the timetable