A Business Broker’s Role in Due Diligence

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This guest article provides an in-depth understanding of how a business broker prepares for and manages the due diligence process, emphasizing best practices and effective strategies employed by business brokers.

This guest article is written by George Wellmer, Founder and CEO of Tupelo.

A Business Broker’s Role in Due Diligence

Deciding to acquire a company, no matter the size or industry, entails risk. Risk mitigation is done through due diligence; it is the crucial step that enables acquirers to thoroughly analyze the target and better understand what it is they are actually trying to buy. 

Due diligence involves participation from various stakeholders in the transaction. One of the key players involved in due diligence is the seller’s representative, for transactions <$10M, these individuals are business brokers. 

Preparation for Due Diligence

A business broker’s preparation for due diligence begins at the point of engagement with the seller. Business brokers commonly pique the interest of business owners by offering complimentary business valuations. During this initial phase, the business broker sets up a data room to securely request and obtain financial records from the potential seller.

Once the seller decides to enlist the services of the business broker, the data room assumes a pivotal role as the primary tool and storage platform. It establishes the groundwork for a seamless due diligence process. The specifics of the company’s size and industry dictate the array of documents the business broker will solicit from the owner. The task of gathering and organizing these documents takes place within the confines of the broker’s data room. This meticulous approach ensures that the documents remain pertinent throughout the entirety of the sale duration.

Generally speaking, the initial documents stored within the data room are: 

    1. Listing Agreement

    2. Three to five years’ worth of financial records, encompassing income statements and balance sheets. This includes both tax returns and statements prepared either internally or by a certified public accountant (CPA).

    3. Interim financial statements

    4. A detailed breakdown of revenue, distinguishing between recurring revenue and insights into customer concentration.

    5. Recast income statement, accompanied by the verification of discretionary expense add-backs.

    6. Documentation confirming the incorporation and ownership of the business.

    7. A comprehensive list of assets. Additional details concerning significant assets—such as maintenance records for vehicles—may also be collected for businesses with substantial assets.

    8. An inventory listing that provides information about the aging of inventory.

    9. Leasing contracts, if applicable.

    10. A roster of customers, highlighting key clients.

    11. Contracts established with essential customers.

    12. An employee roster that identifies critical personnel.

    13. Vendor contracts.

Gathering the paperwork might seem like a trivial pursuit, yet in reality, it frequently proves to be time-consuming. Wrangling small business records seldom follows a straight path. Furthermore, the endeavor of untangling personal expenditures from business expenses is a tedious chore that demands substantial verification effort.

Release of Information

Business brokers assess potential buyers to confirm their sincere interest and financial capability to finalize the transaction. Maintaining the confidentiality of the businesses they represent stands as a pivotal duty for business brokers. Achieving this involves withholding specific identifying details until prospective buyers have signed Non-Disclosure Agreements and exhibited their capacity to pursue the acquisition. Following this milestone, the process of divulging information is personalized according to each broker’s strategy and the arrangement established with the seller. Yet, once a prospective buyer officially signs a Letter of Intent (LOI), the path to information becomes more streamlined, signaling the commencement of the factual due diligence phase.

Managing the Due Diligence Process

The business broker should have already primed the seller of the anticipated buyer’s document and information requests, hence all the work during the preparation for Due Diligence at the start of the engagement. 

When the due diligence phase arrives, the prospective buyer will share a list of documents with the business broker, specifying what they need to assess the company. Seasoned buyers often follow the practice of explaining the importance of each document request. This not only helps business brokers understand the reasoning behind specific requests, but it also allows the broker to guide the prospect to the location of the required information or communicate clearly with the seller about the buyer’s intentions regarding these documents. Business brokers who clearly label documents and provide descriptions within the data room make it easier for buyers to locate the necessary information.

The business broker’s role during due diligence can be broken down into four main responsibilities:

    1. Providing Documents to the Buyer in a Timely Manner
      This begins with the broker’s thorough preparation, setting up a data repository with relevant documents, and preparing the seller for what’s ahead.


    2. Facilitating Communication Between the Buyer’s Team and the Seller
      As questions arise and concerns surface, the business broker acts as a bridge, ensuring smooth communication between the buyer’s team and the seller. Their aim is to keep the conversation flowing without interruptions.


    3. Managing Expectations for Both the Seller and Buyer
      The business broker is ever mindful of the delicate balance between the seller’s aspirations and the buyer’s ambitions; they are the voice of reason. They provide a realistic perspective while aligning optimism with practicality, helping both parties maintain reasonable expectations.


    4. Maintaining Deal Momentum
      The business broker sets a timeline at the start of due diligence and works to ensure the deal stays on track. Challenges inevitably arise during due diligence, and while the business broker might not have all the answers, they know how to connect the right parties to get the necessary information promptly. Their responsibility is to keep the process moving forward smoothly. 

A collaborative approach between the buyer’s team and the seller’s team ensures a smoother acquisition process. The business broker’s expertise lies in adeptly navigating negotiations, aligning interests, and coordinating objectives. Selling a business goes beyond a transaction—it’s an emotionally charged journey. Business brokering is about skillfully bridging gaps and facilitating productive discussions between sellers and potential buyers.

Overcoming Challenges

Amidst the due diligence phase, numerous obstacles and complexities are bound to emerge. It falls upon the business broker to navigate these hurdles, guiding the seller through the process and providing insights on when to make the decision to proceed or step back.

One key aspect is understanding the objectives and timelines of both the seller and the buyer. Business brokers need to grasp the distinct goals and timeframes that each party has in mind. This allows them to align these perspectives and create a common vision that can guide the transaction process effectively.

Building trust is a critical factor during due diligence. Business brokers must establish a sense of trust between the seller and the buyer, given the sensitive nature of this phase. This is achieved through transparent and open communication. By sharing accurate and relevant information openly, Business brokers help build confidence and reduce uncertainties. This, in turn, fosters an environment where both parties feel comfortable discussing their concerns and working collaboratively toward the transaction’s success.

Addressing challenges and potential roadblocks is another crucial role of business brokers. They need to proactively identify common issues that could arise during due diligence and have strategies in place to tackle them. This requires a deep understanding of the industry, regulations, and potential complications that might affect the transaction. Business brokers use their expertise to guide both parties through potential obstacles, ensuring that the due diligence process progresses smoothly. By offering insights, solutions, and careful planning, Business brokers help overcome challenges and pave the way for a successful business transaction.

Streamlining Document Collection and Prospect Verification

In the contemporary landscape, technology emerges as a crucial tool for business brokers. Present-day technological advancements facilitate the creation of seamless data storage spaces. They also automate reminders for sellers to submit necessary documents and enable the monitoring of buyers’ interactions with specific files. Additionally, innovative technology is simplifying the process of verifying potential buyers. These tools are designed to confirm buyers’ financial capabilities through factors like credit scores, proof of funds, and previous experience. They also keep track of all interactions and assign a score to each buyer, while also managing the controlled release of information to maintain confidentiality and increase buyer engagement.

The world of business transactions is evolving in tandem with modern technology. This transformation empowers business brokers to focus on negotiation, expand their sales reach, and enhance confidentiality throughout the transaction process.

Closing the Deal

Ultimately, a business broker is judged by their customer, the seller, on their ability to create a market and sell their business at the right price. While they play a comprehensive role throughout the M&A process, their involvement intensifies during due diligence. A well-orchestrated due diligence procedure contributes significantly to a positive outcome for both the seller and the buyer. This starts from the point of the engagement, with the initial engagement, involving the setup of a data room, fostering trust among all parties, outlining a timeline, disseminating information, addressing queries with precise solutions, and guiding individuals to the right experts. Price negotiation follows suit, culminating in the ultimate closure of the deal.

No transaction is the same, however, the fundamentals remain consistent. Acting as the linchpin, business brokers lead the transaction from inception to conclusion. Employing adept systems facilitates a seamless due diligence experience for all stakeholders involved.

Picture of Written by George Wellmer

Written by George Wellmer

George is the founder of Tupelo, the go-to CRM for business brokers and M&A advisors. Through Tupelo, George has automated repetitive manual tasks and streamlined secure document storage and sharing, enabling advisors to dedicate more time to deal making. Tupelo is M&A intelligence.

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Picture of Written by Roman Beylin

Written by Roman Beylin

Roman Beylin is the founder of DueDilio, a leading online marketplace to assemble an M&A deal team. Our large and growing network of highly vetted independent professionals and boutique firms specialize in M&A advisory, due diligence, and post-acquisition value creation.

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