Selling a Privately Owned Business – Briefing 14 – Due Diligence
When you’ve agreed a deal with your preferred buyer, this will probably be enshrined in a Heads of Terms (see previous briefing) which will trigger a period of “exclusivity” for that buyer, and the start of what is called “due diligence”.
Due Diligence is, in essence, an investigation of your business by the buyer to ensure that the assumptions underlying their offer for the business are correct. This should not be of concern, buyers will quite properly use due diligence as a checking mechanism for the acquisition. However, it’s important that you as vendor are properly organised for this process.
Set out below are ten key points to help you navigate through the due diligence process.
1. There is no need to fear the due diligence process. Provided all information has been fully and accurately supplied, and no unexpected changes in business circumstances arise, then the diligence process should be routine.
2. From a practical viewpoint, the business must always come first, and as vendor you should avoid an (understandable) preoccupation with the deal, or becoming deflected from the normal running of the business, which may itself lead to problems. You may therefore wish to consider increasing your own support to deal with the extra demands of due diligence so that you continue to focus fully on the business right until the end.
3. The main parts of due diligence are financial, legal and commercial. Other specialist types of due diligence can, for example, be environmental diligence, property diligence, and other specialist reviews of areas such as Intellectual Property and Pensions.
4. Financial due diligence involves a detailed examination of the financial affairs of the business, with particular focus on historic, current and projected performance. The buyer will test the assumptions behind the trading and profit projections, as those will have formed the main basis for his offer.
5. Legal due diligence is undertaken by the buyer’s solicitors, and will focus on key contracts and other legal documentation. Issues such as ownership of assets, exposure to litigation, contingent liabilities and intellectual property rights will also be reviewed.
6. Commercial due diligence effectively encompasses all other investigation by the buyer, generally undertaken by the buyer themselves in collaboration with you as vendor. In simple terms this is “getting under the skin” of the business and understanding the key factors which “make it tick”.
7. Often an important part of that commercial diligence is customer diligence, where purchasers may often wish to contact (at least) the company’s major customers to judge relationships and customer satisfaction. Clearly there are considerable commercial sensitivities in this, and in many cases this may not be appropriate, in which case other ways of achieving that feedback must be found.
8. Another important element of commercial due diligence is management and employee diligence, where the buyer will wish to meet with key members of the management and support team, assessing the practical and cultural fit post acquisition.
9. Your lawyers will guide you through the practicalities, but one important thing is for you to be well organised throughout the whole diligence process, and to keep full records of all information that has been handed over or discussed, as that will be part of the legal completion process.
10. Due Diligence may often throw up queries and observations which will require further discussion between you and the buyer, which may genuinely not have been known before Heads of Terms were agreed. This should not be seen as attempts to “chisel down” the price, but part of the normal process and these can almost always be addressed through proper co-operation and discussion.
Once the due diligence process has been completed and all issues have been dealt with, the lawyers can progress with the finalisation of the sale contracts and the final phase of the completion process and the legal Sale & Purchase Agreement. This is covered in our forthcoming briefing.
1 October 2018