What is a due diligence period? Buying or investing in a business is a big decision. The due diligence period is an opportunity to dig deeper into a company’s legal, financial, and operational aspects before you commit to a final purchase. This is your chance to confirm the accuracy of the seller’s representations, as well as to discover any important information the seller might not have disclosed.
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How Long Is the Due Diligence Period?
A buyer has a fixed period of time following a letter of intent to do due diligence. This letter of intent will specify this period, which is negotiable. A starting point is 60-90 days, depending on the complexity of the business. For good cause and if both parties agree, you may extend it.
The due diligence period should be long enough to allow for the buyer to:
- review documentation
- physically inspect assets
- hire professional appraisers to value individual assets or the value of the ongoing business, if desired
- hire due diligence experts to assess all aspects of a business
Allow ample time for the seller to obtain audited financial statements if those statements are not audited already.
You will also want to collect, inspect, or evaluate the following:
- Business registration and current standing in any state in which the seller conducts business
- Audited financial statements for 5 years
- Assets (real estate, personal property, and intellectual property)
- Employee salaries and benefits
- Licenses and permits
- Pending or threatened litigation or environmental issues
- Contracts to which seller is a party
- Product or service lines
- Customer data
- Insurance policies
Using a due diligence checklist is a good way to make sure you don’t leave out anything important. You may want to use a checklist that matches your specific business target. If, for example, your business is a real estate venture, you may wish learn more about real estate due diligence in particular.