Brokers response to due diligence requests

September 06, 2023

by a searcher from University of South Carolina - Darla Moore School of Business in Charleston, SC, USA

The last 8 months, I've brought 3 deals under LOI and 2 out of 3 brokers act as if I'm asking a huge amount of questions in the due dil phase. I gave one of them a list of documents and questions which was about 1.5 pages long. Total was about 20 document requests and about 20 questions. He said he had "never seen a list this long in 20 years".

Are they acting this way so as to prevent me from asking more? Everyone I've spoken with said they request a lot more than I have and it's just a game brokers play.

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Reply by an intermediary
from Clemson University in Raleigh, NC, USA

I provide access to a detailed virtual deal room and am often told by buyers it's the most comprehensive they have ever seen. So, my perspective is from that lens.

When a prospective buyer is asking questions, it's not so much how many, but of what quality. When a buyer asks questions that are already provided in the deal room, their stock drops to near zero. When they ask questions that are irrelevant to the buyer, like "Why did the seller start recording fuel expense under automotive expense?" their stock drops to near zero. Lastly, when provided a list of questions that is obviously an internet cut and paste job (Effectively asking the same question multiple ways) their stock drops to near zero.

This may be controversial, but buyers need to have their act together, be organized and ask appropriate questions at the appropriate time. In the end, if you give a broker a laundry list of questions that have already been answered are duplicative or are irrelevant and expect the broker to do your homework for you the result is that you are going to be eliminated as the probability of such a buyer actually closing is very low.

Reply by a professional
from University of Southern California in North Palm Beach, FL, USA

You need 2 checklists for the diligence. One for pre-LOI. And another for formal due diligence (occurring after the LOI). My clients cover up to 20 topics with brokers and sellers BEFORE submitting an LOI. And not necessarily all at once. We use this data gathering and evaluation document: “Rating of Key Performance Indicators to VALUE Privately Held Company” It’s the topics that can lead to dealmaking. And sooner discovering dumb or dead-end deals. And then during FORMAL due diligence, POST-LOI, there's another 30 (or so) topics that pertain to nearly every kind of transaction. Those topics may lead down some side streets, which will be welcome by legitimate brokers, sellers, buyers. It's a huge mistake to overload brokers and sellers with every question you could imagine asking. Or what some guru said you should ask, or using that master checklist (the kitchen sink) you downloaded online. Why? • Because it's a good way to be dumped (and maybe blacklisted) by sellers and brokers.

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