How exciting! You’ve received a stellar offer for your HVAC business, and you’ve already done some negotiating and reached terms that everybody is content with. Now, it’s time for due diligence.

Business purchase agreements include contingencies and one of those contingencies is sure to be a due diligence clause. A due diligence clause is in place to protect the buyer if any operating or financial details differ from what you revealed in the negotiation process.

Documents You Need For Due Diligence

Due diligence typically includes several aspects of your business, such as financials, legal documents, standard operations, and staff relations. This also includes products, assets, and customer data.

Due diligence can be complex, so your HVAC broker, accountant, or lawyer should be involved to ensure you understand the process and it goes off without a hitch. Here’s a deeper look at what you should prepare to show your buyer.

Financial Documents

Be prepared to turn over audited financial statements from the past three years. You’ve likely been trying your hardest to minimize taxes for your business. That typically means minimizing profits on paper.

You must prepare to account for your claims discretionary earnings and know the answer to questions about any bizarre add-backs. Have financial documents like these ready:

  • Financial statements: Income, cash flow documents, balance sheets, ledgers, accounts payable and receivable
  • Statement of seller’s discretionary earnings
  • Last three tax returns
  • Debts and any liabilities
  • Gross profit margin analysis
  • Fixed and variable expense analysis
  • Gross profits
  • The total value of all inventory, products, and real estate

Operations and Business Structure

The buyer has every right to ask how your business is structured and how it makes a profit. This might include information about competitors, customers, market penetration, or current trends in the HVAC industry that could impact the business’s potential earnings. The buyer also has the right to review your business model, products and services, labor, materials, and operational costs. This list can include:

  • Amendments and articles of incorporation
  • Bylaws
  • List of shareholders and current investors
  • All trademark brand names
  • List of states that the company is licensed to operate in
  • Business compliance requirements
  • Industry trend data, customer analysis, and marketing plans
  • Sales data and customer acquisition channels
  • Company website, domain, and logo

Liabilities and Contracts

Now’s the time to disclose if your HVAC company has partnerships or joint ventures with other companies and has standing loan agreements, lines of credit, or other liabilities. Liabilities and contracts would be things like:

  • Nondisclosure Agreements (NDAs)
  • Warranties, invoices, company purchase orders, or quotes
  • Mortgages, security agreements, or collateral pledges
  • Closing transcripts from mergers or acquisitions, letters of intent, and contracts
  • Any liens or lien waivers
  • Subscription agreements, distribution agreements, sale agreements
  • All lines of credit, promissory notes, and loan agreements
  • Stock purchase agreements

Customer Information

Organize all your customer databases. You’ll most likely disclose information about your largest customer demographic regarding sales and their purchases over the last few years. The seller’s team will also probably ask about your acquiring and retaining customers’ strategies. Prepare the following:

  • All customer data, sales records, and subscriber lists
  • Standard communication and correspondence
  • Events, marketing, and advertising
  • Refund and purchasing policies

Employee Records

Prepare to show an employee roster and organizational chart that identifies your key personnel and their responsibilities. Offer the new business owner insight on what incentivizes your staff and what would help motivate them to stay under the new ownership. Employee records include:

  • Organizational chart and employee roster
  • Independent contractor agreements and other employee contracts
  • Employee tax forms and payroll information
  • Human resources procedures
  • Employee insurance and benefit information

Legal Documents

Don’t try to hide any outstanding legal battles or ongoing litigation. They may ask for your company’s representation and details about the company’s insurance. They may also ask about permits and licensing. The prospective buyer will want to know:

  • The firm representing your company
  • Pending legal cases
  • Insurance policies and coverage
  • Proof of all permits and licenses

Physical and Real Assets

Get ready to show a complete inventory of your business’s property and its current market value, which includes automobiles, equipment, real estate, and sales inventory. Your list should have:

  • All real estate (office locations, warehouses), current leases and titles
  • Fixed assets schedule
  • All vehicles

Intellectual Property

Be prepared to produce all copyrights, trademarks, patents, or other intellectual information the company owns:

  • All company copyrights, patents and trademarks
  • Digital information and rights-owned data
  • Consulting and work-for-hire agreements

Due diligence may seem tedious, but it’s just part of the process. The process will be much easier if you have all your ducks in a row and organize all your documents before selling your business. However, it is not entirely uncommon for issues to arise during due diligence. It’s typical for there to be subtle discrepancies in your financials or operations that you forgot to mention beforehand.

Minor adjustments to price or financing terms can usually solve these issues and save both parties from a huge hassle. You’ve gotten this far; it’s okay to budge a little and close the deal to sell your HVAC company.