Key Stages in the Business Sale Process – Stage 5 – Due Diligence (Part 2)

An article by Peter Watson, Prism Corporate Broking

Has the vendor carried out any pre-sale due diligence? This was a question recently posed to us by a potential acquirer –effectively trying to establish whether a subsequent due diligence process was likely to be a smooth one.

Vendor Due Diligence, where the vendor presents a pre-completed due diligence report to potential purchasers is rare for SMEs, but that does not mean that a business owner should not spend some time ensuring that the business affairs will withstand external scrutiny.

Areas for special attention, not least for their recognised ability to kibosh a deal, include:

    • Share ownership issues
    • Environmental issues
    • Terms of employment and in particular any disputes
    • Contract terms with customers and suppliers
    • Identification and protection of Intellectual property

This is in addition to ensuring that you produce accurate and timely management information. Indeed the ability to manipulate data quickly into different formats gives the potential buyer a very positive impression of financial control, which can be important given that identifying and reducing risk is the name of the game.

Once a formal DD process has started you can expect to receive a multi-page questionnaire from the vendor’s solicitors, followed in likelihood by one from the accountants. Many of the questions can be answered as “not applicable” but some will require the presentation of supporting material. It is now normal for this information to be held in a virtual data room and cross referenced to the questionnaires. This might be simply utilising a simple file storage facility such as box.com but can encompass much more sophisticated (and expensive) solutions offering full document tracking facilities, enhanced security and archiving capabilities. The choice depends in part on the complexity and size of the business, as well as that of the acquirer.

Leaving things until the last minute on the premise that it might never happen anyhow, is likely to become a self-fulfilling prophecy!