Following the execution of a letter of intent (LOI) and/or the asset purchase agreement (APA), the due diligence period unfolds as the seventh step in selling your commercial truck dealership. This is a pivotal phase that permits the buyer to examine the intricacies of the business.
This exploration delves into the dynamics of the due diligence period, contemplating its timing variations, the thorough scrutiny it entails, and the strategic necessity of harmonizing intensive investigations with the continuous operational requirements of the dealership.
Understanding the due diligence period:
- Commencement timing: The due diligence period may begin after mutually executing the letter of intent (LOI) or the definitive agreements. Alternatively, a hybrid approach may be adopted, with less invasive due diligence items occurring post-LOI execution and more intensive scrutiny reserved for the period following definitive agreements execution.
- Rights granted to the buyer: This phase grants the buyer the right to inspect various facets of the dealership, including books and records, assets, inventories, real property, facilities, and contracts to be assumed. The buyer conducts a comprehensive review to ensure that the business aligns with their expectations and the representations made during the negotiation stages.
- Ordered documents: As part of due diligence, certain documents are requested to provide a comprehensive understanding of the dealership's status. These may include appraisals, environmental studies, building inspections, surveys, title reports, and other pertinent documents that contribute to a holistic assessment.
Variations in due diligence timing:
- Post-LOI due diligence: Some less invasive due diligence items, such as an initial review of financial records or preliminary property assessments, may occur post-LOI execution. This allows the buyer to gather essential information before committing to the more intensive process following the execution of the definitive agreement.
- Post-definitive agreements due diligence: The more invasive and detailed due diligence typically occurs after the execution of definitive agreements. This phase involves a thorough examination of financials, property conditions, contracts, and other critical elements, allowing the buyer to validate the representations made during negotiations.
[RELATED: Register now for our upcoming webinar on bolstering your bottom line!]
Navigating the due diligence process:
- Granting Access: During the due diligence period, the seller must grant the buyer access to relevant documents, properties, and records. Open communication and cooperation between the parties are crucial to facilitate a smooth and efficient process.
- Maintaining operational focus: While due diligence is a critical aspect of the sales process, it should not overshadow the ongoing operations of the dealership. Sellers must maintain strict control over their business, ensuring that performance is maximized and potential disruptions are minimized.
- Avoiding distractions: The intense scrutiny of the due diligence period can be demanding, but it's essential not to let it become a distraction. Sellers must balance their involvement in the due diligence process with their responsibilities to the daily operations of the dealership.
Strategic imperatives for sellers:
- Active involvement: Sellers should actively participate in the due diligence process. This involvement not only expedites the review but also allows sellers to address any concerns or questions promptly, contributing to a more cooperative and efficient environment.
- Preparation and transparency: Adequate preparation and transparency are key. By having organized records, clear documentation, and open communication channels, sellers contribute to a smoother due diligence process and foster trust between the parties.
- Operational excellence: Despite the intense focus on due diligence, maintaining operational excellence is paramount. Sellers should not take their foot off the gas in managing and enhancing the dealership's performance, showcasing its value even during the scrutiny phase.
[RELATED: How to draft a definitive agreement during a business sale]
By actively participating, maintaining transparency, and prioritizing operational excellence, sellers navigate the due diligence period with agility, setting the stage for a successful transition.
