We need to talk about Due DiligenceLovewell Blake LLP
You’ve done everything right, you found a buyer, you’ve answered all their questions, you even got the offer letter through, it’s all plain sailing from here right? Well not exactly…
For some people who are new to the world of corporate finance, the words ‘Due Diligence’ may not strike fear into their hearts, but for those of us a bit more grizzled, we are all too aware that Due Diligence is not “something that needs to get over and done with”. It is not without reason that we get that feeling of dread wash over us, this is when all the skeletons in the closet come out and unfortunately your buyer’s advisers don’t get any gold stars for not finding anything wrong.
This is why it is so important to prepare your business in advance of any sale event taking place. I can’t in good conscience sit here and tell you that you can plan for every eventuality, or that there won’t be a question that comes completely from left field, but there are certainly a few foundations you can be laying right now to ease the process.
Almost certainly one of the biggest assets of your company, but they can also be a sore point in the Due Diligence process. Make sure that you have up to date, signed contracts of employment. Temporary or assumed contracts may not be the answer a buyer is looking for.
Over-generous contracts – any acquirer is required to take on your staff on a TUPE (Transfer of Undertakings Protection Employment Regulations 2006 – Catchy right?) basis meaning that any existing contracts you have with staff have to carry over to a new owner. Company cars firm wide may have seemed like a good idea at the time, but could cause the wheels to come off a deal when an acquirer factors in the cost.
Issues with IP
There could be an entire article on intellectual property itself, but for now I will summarise. This is particularly relevant to technology companies, it is a given that anything an employee works on is property of the company, but what about if you subcontract to an outside developer? Or if you work with a customer to develop a piece of software? It is imperative that you understand who owns the IP you are selling and to get things in place before a sale event happens.
You’ve got an exclusive agreement with a national company to supply them with widgets, great news. Can you show the contract that confirms this? I hear this a lot, the sad truth is that a lot of time these relationships are never formalised, and while long term trading relationships count for something, a signed piece of paper means a lot more. Buyers are inherently cautious and are sceptical of anything that isn’t tangible. This may manifest itself in conditions on consideration, reduction of price, or in extreme circumstances, the collapse of the deal altogether in cases where there are significant dependencies.
Whether you rent or own the premises you operate out of, a buyer will be interested in just about everything.
If you are renting a property, now would be a good time to check how long you have left on your lease, make sure you have a change of control clause in the contract, or a break clause if necessary.
If you own the freehold, there are a number of issues to consider, whether you decide to sell the property as part of the transaction or not. It is standard practice for an acquirer to request EPC, PAT tests, Fire Assessments (with any issues identified and how they have been rectified), Asbestos audit (if relevant) details of any building works, the list goes on.
If the property is being retained by the shareholders, it will be necessary to work out the terms of the lease with the acquirer, who ultimately holds the lease and whether the property is transferred to the shareholders or gets moved up to a holding company as each of these have their own quirks.
Timely and Organised
I cannot stress enough how important being timely and organised is.
Buyers will expect you to have all the information they are looking for, to hand and in a format they will understand. The reality is all too often very, very different! A quick due diligence process not only saves everyone endless sleepless nights, but also lets the buyer know that the company is run in an organised manner. As an added bonus, the quicker the process, the less time a buyer has to potentially chip away at the price.
Buyers will want to make sure any documents produced cross reference and can be reconciled. Hastily produced documents often don’t reconcile, so if you don’t already do something, please don’t start producing documents because of the DD process. Similarly, multiple versions of the same document will slow any process down, it may make sense to you that next year’s forecast is made up of a consolidation of six different documents, but this will more than likely confuse a buyer and let doubts creep in about the validity of the data you are providing.
Speaking from experience, we were going through Due Diligence, and the seller gave a document to the buyer, completely in good faith, that ended up not reconciling to any other documentation provided to that point. The truth was, it was never meant to, it was purely for internal use, but the ensuing confusion caused us and the seller to have to go back and try and reconcile the figures for the last three years. We ended up agreeing with the buyer to reconcile one year, an endeavour that ended up setting us back four weeks and threatened to derail the whole process.
Key takeaways, make sure the information you are providing is timely, accurate, cross referenced and perhaps most importantly, easy to follow.
There are considerably more things to consider when going through the Due Diligence process and we would always suggest speaking to an adviser well in advance of getting to this point, to make sure you are representing the business in the best light.