Due diligence acknowledgement

March 31, 2021

by a searcher from New York Chiropractic College in Baltimore, MD, USA

Is it common to sign/write something to formally acknowledge the seller has completed due diligence? Doesn't seem like it accomplishes anything significant to the process other than potentially paint the buyer into a corner.

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Reply by a searcher
in New York, NY, USA

Not clear from your question what stage you’re in, and in what the context the acknowledgment is, but if I’m not misunderstanding you — Yes I’ve seen sellers ask for this in the post-LOI, pre-signing phase. It’s a tad bit draconian but I don’t think it’s unreasonable. Their purpose isn’t to paint you into a corner but to put “time gates” so that you have to progress towards signing at a pace they’re comfortable with. Your LOI is non-binding for you, but it binds them into an exclusivity. They don’t want you to drag things out and cost them months and months if you’re not going to be able to get to the finish line. Your LOI is going to have a long list of contingencies, including the negotiation and consummation of the purchase agreement, financing, due diligence, 3rd party consent, etc. It sounds like the seller is basically looking at that as a checklist, and wants to check off due diligence so that in their mind, it’s one fewer thing that could cause their deal to fall apart. The reason they want acknowledgement for DD is because that’s the most subjective part and you have total say there, so it’s the most ambiguous to the seller. But similarly, at some point they’re going to want to see financing commitment letter, and those required 3rd party consent, and eventually progress towards purchase agreement. But these things are more visible to them so they don’t need you to write an acknowledgment to represent that progress is made. In the end, they want to be able to terminate the LOI and get out of the exclusivity if you fail to “check off” due diligence by a certain time. I wouldn’t stress too about this or let this be the deal killer. At the end of the day, LOI is non binding. They can’t force you to close without a signed purchase agreement and all the other closing contingencies met.

hope this is helpful. Let me know if I totally misunderstood what you’re asking.

Reply by a searcher
from Boston College in Brookline, MA, USA

One possible benefit down the road is that Seller may then "engage" its professionals to proceed on the clock with negotiation of purchase agreement and ancillary documents, with some comfort level as to Buyer's intent and state of mind at that point. That said, nothing obligates Buyer to proceed. If Buyer later backs out and does so for diligence reasons, Seller could try to assert a claim against Buyer for Seller's expenses incurred after Buyer completed diligence and acknowledged as much (i assume the question was intended to ask if an acknowledgement by "buyer" that it has completed DD is worthwhile), provided that the diligence issue raised by buyer relates to diligence received by Buyer prior to the acknowledgement. Ideally the acknowledgement would also contain some sort of statement that the Buyer is satisfied with what it has learned to date -- which Buyers would be reluctant to do given there's no upside to them in doing so. Most deals don't have such an acknowledgement, to answer your question. And as others have pointed out, diligence doesn't ever actually end. It continues right up through closing.

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