Notes on the Due Diligence Process in the Sale of a Business

Continuing with the theme of selling a business (see ExactTarget and Pardot Join Forces) I wanted to spend some time talking about the due diligence process. Due diligence is the time after the letter of intent (LOI) is signed until the deal actually closes. For us, we signed up for a 60 day due diligence period (usually there is a no shop clause which means once you enter due diligence, you can’t talk to other potential acquirers) but it only took 45 days until we closed.

Here’s how the six week due diligence process went (roughly 1-2 days per spent spent on each thing):

• Start – 250 item due diligence Excel spreadsheet requesting every piece of information you can imagine (e.g. all legal documents of any sort, employees, customers, partners, financials, source code, etc)
• Week 1 – accounting review on-site with finance people from the potential acquirer talking through the audited financials (note: AICPA independent audits are different from SEC independent audits), discussion of our financial models for next calendar year including key drivers, and review of areas needing more investment
• Week 2 – technical review on-site with engineering, infrastructure, and product management from the potential acquirer talking through the product architecture, database schema, hosting infrastructure, and source code
• Week 3 – HR review on-site with the head of HR from the potential acquirer talking through every single employee on staff, hiring process, corporate culture, and how to bring the companies together
• Week 4 – the most senior leadership from the potential acquirer come on-site and talk about the shared vision, potential, and alignment
• Week 5 – iron out the purchase agreement, employment agreements, disclosures, releases, and timing of everything for close
• Week 6 – close the deal!

All this while still running the business, and, unfortunately, not being able to talk about it with all but a handful of employees. Coordinating and delivering the necessary information for the due diligence process is nearly a full-time job. So, if you’re thinking about selling your business and are serious, go ahead and start getting everything that’s ever happened in the business in order and digitize anything in paper form.

What else? What are your thoughts on the due diligence process in the sale of a business?