What Due Diligence Really Means

Chances are you’re responsible for it, but you’re not quite sure what it is. Whether you’re on the buying or the selling side of a transportation business sale, the concept of “due diligence” can be intimidating or even downright frightening. If you’re a seller, you’re the one “under the gun” in an audit, but if you’re the buyer, it’s still your job to determine whether buying the transportation business will be wise. If both sides properly perform due diligence, the interests of both will be protected.

Understanding the Due Diligence Process

The basic idea behind due diligence is that a buyer performs in-depth research and evaluation of a transportation company that is for sale over a period of time (typically several weeks). As the process unfolds, it typically includes reviewing documentation such as legal history, operations, structure, financials, and policies and procedures. As follow-up to the evaluations of these documents, interviews with hired professionals such as accountants and attorneys may be used as well. During this intense process, the goal is to determine whether these two qualifications are met:

1. The transportation business for sale has been accurately portrayed by the seller
2. The transportation business for sale will be a good fit for the buyer.

Keeping those goals in view, the idea of due diligence is to prevent both parties from wasting their time working on a deal that simply won’t go through.

Maintaining Confidentiality During Due Diligence

During this pivotal process, the buyer becomes privy to sensitive information such as customer contracts, employee records, and supplier lists. Especially if the potential buyer decides to interview some of these major players, caution must be taken in order to avoid communicating the prospective buy-out.

When people catch wind of major changes, uncertainty is a natural result. With that uncertainty, business can be disrupted or even weakened, which can be detrimental to both the current owner and the future owner of the transportation business. In order to protect assets, business owners often require that a letter of intent (LOI) has been drafted before they will allow such due diligence to take place.

Pin-Pointing Risks During Due Diligence

If you’re a prospective buyer performing due diligence, you may not be sure exactly what to look for. Red flags to consider include the following:
• Multiple short-term owners
• Legal disputes
• Pending litigation
• Negative relationships with suppliers
• Other unresolved issues

In addition to finding out about the transportation business’s history and current status and relationships, you’ll want to evaluate the seller’s stated reason for selling. There may be hidden reasons for the sale that would make buying the business a poor investment on your part.

While all investments carry risk, performing careful and thorough due diligence can help prevent surprises from popping up later on. Transportation business experts at The Tenney Group (website) can help guide you through the process and promote a positive transaction experience for all involved.