Performing Due Diligence


Question: Mr. Michaels, I own a small telemessaging service, and I have been approached by a large conglomerate wanting to purchase my accounts only. The following is a list of information they require before putting in an offer or (LOI) Letter of Intent.

  • A brief description of my business model
  • A copy of all contracts signed by my clients
  • A copy of the agreement with my phone company
  • My last three years’ audited financial statements and tax returns
  • A copy of projections, budgets, and strategic plans
  • A schedule of inventory
  • A schedule of indebtedness and contingent liabilities
  • A schedule of fixed assets and location thereof

Is this really necessary?

Answer: Typically, these types of questions are standard for Fortune 500 companies or for companies from that school of thought. However, these due diligence items are not the norm for the telemessaging industry. What is usually requested are three years of tax returns and six months of financial statements, bank deposits to verify monthly billing, and a description of the types of clientele.  Generally, you never want to give a potential buyer your customer list or DID numbers. There is no inventory in a service business to speak of, and a schedule of fixed assets would only be provided if the potential buyer were purchasing the entire business. Generally, it will be an asset sale only, so a schedule of indebtedness and contingent of liabilities is completely out of the question (unless they are buying your corporation).

When a buyer is purchasing the accounts only, a document called a “Satisfaction of Due Diligence Agreement” can be executed once the buyer has completed their due diligence and is moving forward with the purchase.  This agreement states that the buyer has completed their due diligence, submitted an escrow deposit, and is ready to buy the client list. The document allows them to receive the client list prior to closing for the inputting of client data in preparation for the cutover. This can take up to two weeks and needs to be done prior to closing, so that once papers are signed and payment is made, the buyer immediately can take possession of the clients.  The agreement stipulates that if the deal falls through, the buyer is not allowed to solicit any of the seller’s clients for a number of years.

In the telemessaging industry, audited financial statements are usually not done. Most buyers purchase a telemessaging call center as an asset sale. Therefore, a buyer is not assuming any of the debt of the seller and audited statements are not necessary. If a potential buyer insists on having audited statements, then I would suggest that the potential buyer pay for that service, since it is quite costly. As for projections and strategic plans, as a small operation, your plans would be to increase clientele, pay your staff, and work hard to maintain a profitable business.


Steve Michaels

About Steve Michaels

Mr. Michaels owned his own telephone answering service in Palo Alto, California and was the founder and publisher of the Connections Magazine. He has personally published over 200 TAS related articles including a monthly segment called "Mind Your Business" which was featured in Connections Magazine. He also e-mails a highly regarded newsletter called "TAS Tips" to over 1500 businesses. Steve has been a speaker for this industry and has worked for 4 major TAS/Voice mail companies including a manufacturing company, which he helped to take public.