You have endured multiple meetings with potential buyers. You’ve written dozens of emails and suffered through several rounds of negotiations to secure the best price and deal structure. At last you have decided on the offer to accept. That’s the worst of it over then? Think again – you have yet to experience the joys of due diligence and sale contract negotiation.
What is Due Diligence (When Selling a Business)?
So what is due diligence? It is the most thorough examination of your financial statements, business records and contractual arrangements imaginable. All performed by the buyer’s experienced and highly skeptical advisors. If there are any weaknesses in your business, or hidden problems, they will inevitably be found. You should expect questionnaires running to tens of pages, endless follow up questions and requests for additional information.
Sale & Purchase Contracts: What to Expect
Just wait until you see the sale and purchase contract. If you are selling shares a minimum of seventy to eighty pages of promises you have to make about the business, and steps you will take to make the sellers whole if they turn out to be untrue. Thousands of clever lawyers have contributed to this contract over decades of work so it covers every possible aspect of business activity. You may be on the hook for problems with inventory, employment matters and other commercial arrangements for at least a couple of years. Liability on taxation and regulatory issues can potentially last for ever.
So how do you survive these multiple minefields?
In my experience two things are essential – good preparation, and an unyielding commitment to full disclosure.
Preparation comes in two forms. Your broker or lawyer should provide you with a list of all the documentation and disclosures a buyer will typically ask for in due diligence. Things go best when you pull all this information together in a data room before due diligence begins, rather than releasing it piecemeal as the process unfolds. This gives your advisors time to fully review each piece of information and prepare answers for any issues likely to arise. The second area of preparation is a detailed record of the issues that have been raised, and agreements that have been made, during negotiation. Your broker should turn this into a detailed Letter of Intent to be signed by both buyer and seller. The lawyers will incorporate these details into the various contracts and supporting schedules.
Full disclosure is an absolute requirement if your sale is to survive the two to three month journey from agreeing to a deal to legal completion. If problems are found by the buyers in due diligence, or if you try to change the contract at the last minute, a deal will almost always fall apart. Buyers will wonder what else has been hidden if an undisclosed problem is brought to light. It is always a mistake to hide problems. Almost any issue can be handled by your advisors if it is disclosed at the start, and presented alongside solutions to mitigate or manage the issue.