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Eyeing a small-business deal? Think due diligence.

While the U.S. Census Bureau reports there are approximately 32 million small businesses in the US, only a third of them have employees and must meet a weekly payroll. While all small businesses are vital to the economic health of our country, I am only referencing the one-third of small businesses with payroll for the purposes of this discussion.

Whether your small business is for sale or you are in the market to purchase a small business, a heightened emphasis on compliance is currently slowing down the due diligence process. Buyers and sellers alike are asking for more assurances and information about how a business manages its policies, procedures and processes to remain in compliance.

What has been slowing the process down from the seller’s side of the equation is being able to assemble all the information needed in an organized fashion to share with the potential buyer. This information can include everything from how the seller deals with consumer complaints to how they respond to these complaints, which many times are simply disputes.

Each industry will have its own unique reporting requirements. A restaurant may have to account for food safety and sanitary issues, a food delivery service may have to account for pedestrian injuries and a telemarketing company may have to deal with Telephone Consumer Protection Act issues.

The structure of a transaction, whether an asset or stock sale, will lead to differing implications for assumed liabilities for the buyer post-transaction. This will impact the level of diligence required. The most tax-advantageous structure to the seller of a business will likely be a structure that leads to greater legal exposure for the buyer, requiring more extensive diligence efforts.

Seek experienced legal counsel

Having legal counsel retained who is knowledgeable in this area – internal or outsourced – who can answer questions around any recent lawsuits or legal actions against the company can accelerate the due diligence process.

At our mergers and acquisitions company, we have experienced firsthand how an experienced attorney who understands an industry can help to accelerate the due diligence and legal documentation process.

Prepare compliance materials ahead of time

Any small business thinking of putting itself on the market or is already on the market should take time to prepare compliance materials and have as much available right from the beginning to avoid issues that can come up later.

The more preparation work that can be done on the compliance side will help to shave off valuable time in the due diligence process.

Sellers of small businesses should always disclose, disclose, disclose during a negotiation. There is no point in hoping a prospective buyer will not find out about a troublesome issue – a “skeleton in the closet” – or that the issue is not relevant/applicable to the due diligence process.

In the long run, if you are selling a small business you will be much better off putting everything out on the table, while explaining what, if anything, happened in the past regarding any inquiries. By doing so the seller can anticipate the possibility the buyer could come back later to claim he or she didn’t share information. Even worse, the purchaser could file a lawsuit post-transaction leading to years of legal action.

You should begin by establishing a trusting relationship with an M&A specialist, before either buying or selling a small business. As in all aspects of your business life, it is never too soon to start planning ahead.

Michael Lamm is a managing partner at Corporate Advisory Solutions, a merchant bank headquartered in Philadelphia and serving Lehigh Valley businesses. He can be reached at mlamm@corpadvisorysolutions.com or 202-904-7192.

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