You’re ecstatic! You’ve just signed a Letter of Intent to sell your business at a price that far exceeded your expectations. Soon you’ll be able to kick back and enjoy life. But wait, what’s this? A “Due Diligence List” from your Buyer that goes on for ten pages. Do you really need to dredge up all of this information, all of these documents? As painful and distracting as it might be, yes you do, and here’s why.

Terms set out in a Letter of Intent reflect the Buyer’s current understanding of value and risk. Once the LOI is signed, the parties move on to contract preparation, negotiation and closing. A proper LOI will provide that the deal cannot go forward unless and until the Buyer completes a Due Diligence examination of your business. This exercise affords the Buyer a closer look at your business, refines risk, and influences contract drafting and final negotiations.

Due Diligence can be a painfully detailed process and Sellers are sometimes tempted to look for shortcuts, providing partial or incomplete responses to the Buyer’s inquiries. After all, until it’s sold, you have a business to run. However, a halfhearted attempt by the Seller during Due Diligence can have severe consequences.

First, a savvy Buyer can tell when you are short-arming your responses. The Buyer may attempt to insulate itself against unknown, undisclosed risks by taking harder positions in contract negotiations or seeking a purchase price reduction. Worst case, the Buyer might be spooked by your intransigence and walk away from the deal.

Second, contemporary buy/sell agreements contain representations and warranties of the Seller, affording the Seller an opportunity to call out exceptions (e.g. “The Seller represents that is not subject to any claims or litigation except as described in the attached Schedule.”) Should a representation or warranty prove to be untrue, the Buyer is likely to have a post-Closing claim against the Seller. Without the proper effort required to complete Due Diligence, the Seller may miss a risk that should be disclosed in the buy/sell agreement, leaving the Seller exposed to recourse by the Buyer.

Third, assuming your deal does close, the Buyer is likely to have reserved the right to press indemnity claims against the Seller for violations of representation and warranties. A weak Due Diligence effort and correspondingly porous representations and warranties make you particularly vulnerable to indemnity claims.  Depending upon how the buy/sell agreement is drafted, your exposure may be a significant percentage of the consideration paid by the Buyer. Moreover, a nervous Buyer may have required that a portion of the purchase consideration be placed in escrow in anticipation of future indemnity claims.

Finally, closing of the deal turns out not to be a closing at all. You’re left with an adversarial process with an unhappy Buyer who wants a chunk of its purchase price back by pursuing indemnity claims. You won’t be kicking back any time soon. Next time, take the Due Diligence process seriously.