Due Diligence is a Two-Way Street When Selling A Business


I recently had coffee with a business owner who sold his business two years ago, and he didn’t have a great experience. He didn’t think the buyer had been truthful with him about what his role would be after the sale or what the buyer planned to do with the company. Digging a bit deeper, it seemed he spent so much time answering the buyer’s questions during due diligence that he didn’t ask the buyer many questions. In fact, he felt uncomfortable asking the buyer direct questions as he didn’t want to possibly jeopardize the deal.


This is a common challenge for business owners during the due diligence process. Instead of asking direct questions, they make assumptions based on random conversations throughout due diligence, often leading to disappointment and feeling misled by the buyer. The due diligence process is a two-way street. Both sides should be asking questions and learning as much about the other as possible.

There are many questions a seller should ask a potential buyer, and they will vary based on the specific transaction. To get you started, I’ve included what I believe are the top five questions you might consider asking potential buyers when selling a business.

Have you acquired companies before?
The buyer’s experience of actually buying companies is important to understand early in your discussions. Lifestyle buyers (individuals who are “buying an income stream”) will be less experienced than strategic or financial buyers. Some sellers might think an inexperienced buyer is preferable, as it will give the seller the upper hand in negotiations. However, inexperienced buyers can create delays in the process and may have issues actually getting the deal done. Ask them questions about their past acquisitions and knowledge of the overall sale process. Knowing their experience level will better prepare you to successfully navigate the sale process.

How will you pay for the acquisition?
Once you understand if they know how to buy a company, you need to know if they have the money to do so. Buyers should be clear from the beginning how they plan to pay for the acquisition. Sellers should not feel uncomfortable asking them pointed questions on this topic. If buyers are planning to use debt to fund the acquisition, make sure you have assurances from their lenders that they will get the financing. You don’t want to get to the closing table and have the sale fall apart because their funding didn’t come through. Lifestyle buyers might want to arrange for seller financing. There are many risks in seller financing that you should consider before entering into an arrangement (too many to get into here). The overarching risk is that the seller only gets a portion of the purchase price in cash at closing, and there’s a risk they’ll never receive the remainder of the purchase price. If the buyer is relying on future cash flows of the business to repay the seller and the business declines, the seller may get short-changed. Don’t move forward with a potential buyer who is unsure of how he will pay for the acquisition.

What are your plans for the business in the future?
If you’ve decided on seller financing (as discussed above) or are deferring a portion of your purchase price through an earn-out, you want to be sure the business will be profitable enough to make those future payments to you, the seller. Don’t hesitate to ask detailed questions about what the buyer intends to do with the business in the short-term and long-term. It’s not uncommon for a new owner to make investments and strategic changes in the first few years to maximize a longer-term return on their investment. As a seller, this may be a risk if you’re counting on the short-term cash flows to make those deferred payments. You may also be concerned with your brand continuing under a new owner. You’ve built a solid reputation, and your name may even be the brand. How will you feel if the new owner takes the company in a different direction? If this is important to you, dig into the potential buyer’s plans for the business before committing to them.

Will you keep any or all of my employees?

You’ve built a successful company and have provided for your employees and their families. In fact, they may feel like family to you. Is it important that your employees retain their jobs after you leave? If so, make sure you understand the potential buyer’s plans for your employees. If it’s a strategic buyer who will be combining your business with theirs, are they planning to lay off employees? Some sellers will choose a different buyer to make sure their employees still have a place to work. Depending on your priorities, this could be a deciding factor for you when selecting a potential buyer.

Will you want me to stay on in some capacity?
If you’ve decided you want to sell your business, receive all your cash up front and completely exit the business, communicate those plans up front. If “you are the business,” the buyer may want you to stay for a transition period. If you’ve deferred a portion of your proceeds, you may want to stay involved to help the business create the cash flows needed to fund your deferred payments. Before you decide (or agree) to stay, ask yourself, “Can I be a part of this company without being the owner? Am I okay with not being the final decision-maker?” It can be very difficult to hand over control to someone else while you’re still at the company. You could remain as CEO, President, or VP of sales or become a consultant. Whatever your role may be, it is essential that you clearly define your responsibilities prior to closing the transaction while you still have the ability to negotiate those terms.

I’ve only scratched the surface of the types of questions a seller should ask a potential buyer during due diligence. Make the time to perform your own due diligence on your potential buyer, so you can avoid unwelcome surprises after the transaction closes.


By Tensie Homan
May 21, 2014