How Should You Handle a Buyer's Due Diligence After Signing a Letter of Intent?

This page is for the owner of an established, founder-led company in Miami or South Florida who has signed a letter of intent, or is about to, and now faces the buyer's requests. If the letter is still a draft, start with our guide to what to settle before signing a letter of intent. Preparing the company before a sale process begins is covered in our guide to exit readiness.

What is due diligence, and what is the buyer testing?

Due diligence is the buyer's investigation of the company to test the proposed purchase. Much of it happens before the purchase agreement is signed, and depending on that agreement's terms some checks and updates can continue until closing. The buyer is checking whether the evidence supports the assumptions behind its offer, starting with the earnings it priced and the customers it expects to keep. Its accountants, attorneys and other specialists may each examine a different part of the company, and each will compare what they find with what you said before the letter was signed.

In a founder-led company the buyer is also testing whether the business keeps performing without you. Customer relationships that run through you and decisions that still wait for your approval both raise doubt about how the company performs after you step back, and a buyer may reflect that doubt in the earnings it relies on. Describe those dependencies accurately, explain how each responsibility would be covered and show what your managers already handle on their own.

Ask your attorney and tax adviser which legal and tax matters the buyer is likely to examine, and let them decide how those requests are answered.

How should you organize the buyer's requests?

Name one coordinator. In a smaller company this is often the finance lead or an adviser who works closely with you, and it should be someone with the authority to ask anyone in the company for information. The buyer's requests and your answers to them both pass through that person.

Keep one written record of every request and every answer. It shows who asked, who prepared the response, who reviewed it, which document and which version was supplied, and what is still open. Record answers given in calls and meetings as well. When the buyer asks the same question twice, or two of its specialists ask it in different words, the record shows what was already said.

Leave a request open when the answer is incomplete. Say what is still being checked and who is checking it. An answer given from memory under pressure and corrected later raises more questions than a short delay.

Put approved documents in one shared folder, organized to match the buyer's request list, with access limited to the people the buyer has named. Before granting access, ask your attorney to confirm the confidentiality terms and how the buyer may use what it receives. If the talks end, your attorney directs how access is closed and how the buyer returns or destroys the information.

Keep earlier versions when a document changes. If an answer or document already supplied turns out to be wrong or incomplete, raise it promptly with the relevant adviser and agree how to correct it. The coordinator records which earlier answer was corrected, when and to whom. Keep your own copy of everything supplied, under a retention plan your attorney agrees.

Ask your attorney what customer and employee information can be shared, with whom and at what stage, before anything sensitive goes out. A summary, a record with identifying details removed or access limited to the buyer's advisers may meet a request, and the question matters most when the buyer competes with you. Route every request to contact a customer or an employee through you and your attorney. Check what your signed agreements say, and agree the purpose of the contact, who takes part and what may be discussed before anything is arranged.

Have someone other than the author check each answer before it leaves the company. The person who prepares a response may know the subject well and still miss a conflict with something supplied elsewhere.

What should you prepare for each kind of request?

Use the table to assign each kind of request before the buyer's list arrives. Your attorney and accountant may change who answers what, and the buyer's list may be organized differently.

Connect each answer to the document that supports it. If a record does not exist, say so and agree with the relevant adviser how to answer. Label any document created now to fill a gap with the date it was prepared, so the buyer does not take it for a record the company kept at the time.

Should you disclose a problem before the buyer finds it?

Yes, in the way your attorney advises. Take every known problem to your attorney first, establish the facts and agree how and where it will be disclosed. Separate what you know from what you are still checking, and describe any action already taken without calling the problem solved before it is.

Carlos acquires businesses in Miami with Carolina Duran, an interest we disclose, so he runs diligence as a buyer. A buyer can weigh a problem the seller discloses early against its offer and decide whether it changes the price, the structure of the deal or nothing at all. The seller's explanation arrives with the problem, and the buyer can test it.

A problem the buyer finds on its own can raise a second question, which is what else has not been said. The buyer may widen its requests, and answers it had already accepted may need more evidence. How far that goes depends on the problem and on why it was not disclosed.

Early disclosure does not guarantee that the buyer proceeds or keeps its offer unchanged. Work with your attorney on the wording and on any disclosure documents the purchase agreement requires, and check the facts in them yourself. Ask whether a matter needs to be disclosed there even when the buyer already learned of it during diligence.

Should you commission your own earnings review before the buyer's?

Consider it, with your accountant and tax adviser deciding the scope. A seller-side review of earnings, often called a quality of earnings review, is prepared by an accountant you hire. It tests how well the reported earnings describe the business a buyer would take over, including unusual income or expenses and the adjustments you have made when presenting the company's results.

A review done early lets you find a weak explanation before the buyer's accountants do. Ask your accountant which records need correcting and how to document each correction, and gather support for the explanations you will give. Depending on its scope, the review may also examine what it would cost to replace work you do yourself.

The buyer may still commission its own review and reach a different view. Ask your accountant how to present the findings and what limits the work carries, and ask your attorney whether to share the report and on what terms. The review is a separate piece of work from your own private estimate of value, which helps you decide whether to sell at all.

How do you keep running the company during diligence?

Results that slip during diligence give the buyer a reason to revisit its assumptions and possibly its terms, so keeping the company performing is part of the diligence work.

Arrange cover for day-to-day operations, usually a capable deputy with the capacity for the work, clear authority and a short written list of the decisions that still need you. Check any change in authority against the limits in your signed agreements before you make it. Route the buyer's requests through the coordinator so they reach you at set review times.

Keep reviewing performance against the forecasts and expectations you gave the buyer. If a result falls short, find out why and prepare an accurate explanation with your accountant before the buyer asks.

Ask your attorney whether the letter limits how you run the company until closing and which decisions need the buyer's consent. Check any significant decision against that answer before you commit to it.

Assigning diligence work to an employee tells that employee about the sale, so decide who needs to know before you hand out the work. Our guide to telling your team about a sale covers that conversation.

Once your attorney has agreed which managers take part and what they may discuss, let the managers who own each process explain it to the buyer. Carlos's line from his banking years is the one we work from: "Your valuation scales only when your absence doesn't threaten the business." Diligence shows a buyer whether that holds, through the answers your managers give on their own.

What if diligence turns something up?

Understand the finding before you respond. Ask for the information behind it and have the relevant adviser review it. Then establish whether the buyer has found an error, misread a record or learned something that changes its view of the business.

Ask the buyer to explain the effect against the assumptions behind its offer. Your accountant can test the financial reading, and your attorney can say what the finding means for your obligations. If you disagree, answer with the supporting evidence and keep the exchange in the request record.

Your options depend on what the finding is. A problem may be fixed before closing, handled through the structure of the deal or reflected in a revised price. Before you decide to end the talks, have your attorney confirm the steps required and any obligations that continue. Our guide to how the price can change after you sign covers a revised proposal and the record that lets you test it.

A buyer may also ask for protection in the purchase agreement, such as specific promises about the problem or part of the price held back after closing. Your attorney and tax adviser should explain what each request would mean for you before you agree to it.

What should you ask your attorney, accountant and tax adviser?

• Which known problems should we disclose, and how and where should each be disclosed?
• What safeguards should apply before customer names, employee pay or contracts go to the buyer?
• Do the explanations of our earnings match the records, and what should a seller-side earnings review cover?
• What would the representations, warranties or indemnities the buyer asks for mean for me, and how would any amount held back after closing work?
• What does the letter already commit me to, including limits on running the company and on ending the talks?
• How would a change the buyer proposes to the deal structure affect my tax?

What should you do next?

• Name the coordinator. Confirm who keeps the request record, who supplies information and who reviews each answer before release.
• Take known problems to your attorney. Gather the records behind each one and agree how it will be disclosed before the buyer reaches it.
• Agree what can be released. Set up the shared folder with limited access, and agree with your attorney what customer and employee information goes out, to whom and when.
• Arrange cover for day-to-day operations. Give the work to someone with the capacity and authority for it, write down the decisions that still need you, and keep reviewing results against what you told the buyer.

The Leadership Scorecard takes ten minutes and shows which parts of the company still depend on you, the question a buyer's diligence tests in a founder-led company.