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.
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.
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.
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.
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.
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.
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
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.
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.
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.
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.
5 December 2019