What is a due diligence period in a business purchase agreement?
When buying a business, the Buyer should always insist on a due diligence inspection period in the purchase agreement. This way the buyer can have a reasonable time to inspect the business to evaluate its condition. In Michigan, a period of no less than 14 days is common, but depending on the size of the deal, this period could be significantly shorter or longer.
Options to extend the inspection period are also common. Buyers include these provisions when they expect to need more time to make a proper decision. These should be negotiated up front, but sometimes buyers ask for them once the purchase agreement is signed. A seller will usually require the buyer to pay for this extra time either by payment of a fee or requiring that a portion of the initial deposit be forfeited in exchange for the extension.
What should be in a due diligence provision?
The due diligence clause should give you broad rights to inspect the target business. The buyer needs to investigate the financial records, customer lists, vendor lists, insurance policies, equipment, contracts, real property, and tax returns of the business to name just a few. The clause should also state that the seller will cooperate with the buyer in providing information relative to all items.
One common concern is that sellers dislike potential buyers interviewing employees because this could affect operations. Buyers should try to negotiate the right to interview key employees in confidence to gain a better understanding of the business.
Other frequent restrictions in a due diligence provision include requirements of notice of inspections and the days and times when they can occur. Similarly, it’s very common to see provisions relating to indemnification for damages caused by a buyer’s investigation.
Lastly, a due diligence provision should give the buyer the right to end the contract if they are unsatisfied with the results in the buyer’s sole discretion. The provision should also explain how notice is to be given so that disputes do not arise that notice was not given.
A due diligence period should protect the rights of a buyer and seller. The parties should ensure that a business attorney reviews these terms and assists during the exchange of information during the sale.