Speaker 1: Hi there, it's Brett Senkis, the right-brained business attorney, and today we're talking about due diligence. So this is a topic that comes up in all sorts of different contexts in the law. Lenders perform due diligence before they give loans. There's other contexts which venture capital investors will do due diligence on a company, but I'm talking about it today in the mergers and acquisitions context. So if you're selling your business, this is a concept that you're going to have to warm up to, and I'm looking right now at a due diligence checklist. So this is something that a buyer, once they've signed a letter of intent or once they've had some indication of interest, they feel like a deal is happening. They will send over to the seller of the business a list of things that they'd like to see. So this is organized by topics. It's got finance, it has legal, operational, strategic, human resources, basically the main functions of the business, and then it's a request for certain documents. So due diligence is the process of kicking the tires and being sure that what you're buying in this case is what you think you're buying. And so this can be a pretty painful process for sellers because it's kind of like a root canal for the business, and you're really forced to gather lots of documents and produce them. There's multiple rounds of follow-on questions. If it's a big business, a large business, and there's big deal teams, the questions can come from all sorts of different directions. It's common to organize all the due diligence items, so your responses, into folders. You can do it in Dropbox or Google Documents. There are off-the-shelf products out there, intralinks and iDeals and things like that, that are built for this purpose. But you're going to get this as a seller, and it's going to be a request. Give us an organizational chart. Give us financials for the last three years, profit and loss statements, income statements, cash flow statements. Give us tax returns, customer lists, top 10 customers each of the past three years, and the total volume they've done. Give us all your contracts. I mean, it's just about everything, and it can be very, very in-depth. And the process can take a few days, can take a few weeks, can take a few months for larger deals. Back in the day, before the internet was what it is today, back in the late 90s when I started practicing, we would actually do this in physical locations. We called them deal rooms or war rooms, where people would get together and there'd be boxes and boxes of these documents. You count yourself fortunate that you don't have to go through that today, but it's still a very involved process, and as a seller, it can be pretty painful. One way to deal with that is to just understand what's coming, to get a copy of a due diligence request list and just map out what the buyer's going to be looking for. And so part of this is being organized, which will make it easier to respond. So if you could do this before you get deep into negotiating the sale of the business, that's helpful. If you know you're selling the business, to start thinking about it this way. And in today's day and age of electronic files, you probably have some file structure system already. So if you're looking for all your contracts, all your permits, leases, you're looking for HR records, I mean, it's very, very in-depth. It goes without saying that you would only provide this information, whether they're a competitor or not, under the cover of a non-disclosure agreement. That would be very, very common in this context. And so as a buyer, there aren't many examples, or yeah, I mean, I guess there's quite a few add up over the years, but it's not that common to see a deal fall apart during due diligence. It tends to be more of a perfunctory sort of rubber stamp that the buyer's buying what they think they're buying, or they might find something that's problematic and causes a renegotiation of the terms. Sometimes the deals do blow out, you know, and that happens more if we, you know, if I represent the seller and we haven't let the buyer very under the hood, and maybe they just don't have a great idea of what the finances and things really look like when you get in there. But for the most part, you can expect it's probably going to be a relatively perfunctory, let's just make sure I'm getting what I think I'm getting. It won't make it any simpler for you to deal with from a, it's just, it can be pretty taxing on time. But bear in mind that there's a light ahead, that this should, you know, most cases be a rubber stamp and your deal should hold okay. You want to avoid major surprises. If there's big issues, talk about that up front with your counsel and your advisors. How are we going to deal with this? When is the proper time to show this? You know, how do we address these things? And think that through. Obviously you have to disclose every major issue when you're selling your business, anything that could possibly be material, but there is some degree of discretion regarding when you do that and how you do that. It's best if that doesn't just pop up while someone's sort of randomly doing a little due diligence. And number two, a buyer's looking to make sure you're organized. So some of that process, and your advisors can help you through that, is to show that this business is well kept, it's tight, it's organized, the contracts have every page, and they're signed, and you know, stuff like that. So again, it can be kind of painful from a time and labor standpoint, but it shouldn't blow your deal. On the buyer side of things, there's no limit to what you can ask for, so it's just kind of what makes sense to see. Again, they come over in this form usually, five, six, seven pages, lots and lots and lots of requests, but you're going to have a short list as a buyer of the things that are particularly important, and usually that's going to look like financial, that's going to look like the contracts with major customers, you know, things of that nature. So if you have questions about due diligence, certainly reach out. If you've gotten the point where you're doing it, congratulations, you're close to the finish line, hang in there.