Why you need someone watching your back: The Painful Truth About Business Due Diligence

I had a business buyer contact me to do a business analysis/due diligence. He had already signed an offer, signed the escrow instructions, and sent a large check as a deposit to escrow. I never saw any  documents until after the deal blew up. 

What happened in summary is this.  The contract had a contingency clause making the deal subject to passing a due diligence check. The escrow instructions, which are supposed to mirror the purchase agreement, did not have such a clause. The escrow instructions said that due diligence had been completed and approved, which at the time the buyer signed, had not actually taken place yet.

When the buyer cancelled the purchase after the business failed the due diligence, the escrow dispersed the funds to the seller and listing broker rather than returning them to the buyer.

Why did they do that?

Because, the escrow had no terms in it for the buyer to back out of the deal.

The broker had the escrow instructions written differently than the contract, even though the broker was a dual agent.

If you think that spending less than 2% of the purchase price on due diligence is too much money, try losing a 10% deposit, or finding out the business was only worth half of what was represented!

I invite your comments.

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