• Orr Litchfield, english
  •       Thursday, 23 May 2019   

    Preparing your business for sale – Are you ready for Buyer due diligence?

    Overview

    In previous articles we explored common reasons why business owners choose to sell their businesses, the importance of identifying your overall personal, financial and business objectives and setting realistic goals for the sale of your business, which correspond with your overall objectives and fine-tuning your business in order to enhance your chances of maximising your sale price and minimising your risk on the sale of your business.

    Once you have spent time fine-tuning your business for sale, you need to get ready for the Buyer due diligence process. Buyer due diligence is the information gathering process carried out by a prospective buyer to find out as much information as possible about the target business and assets as early as possible in the negotiation process in order to decide whether to purchase the target and determine or verify the appropriate price (and/or price and risk structure).The buyer due diligence process is likely to consist of six key stages:

    1. Initial Enquiry Stage

    Firstly, a prospective buyer may contact you and request general information about the business. You should have a summary and/or an information pack available containing the general information, which you are willing to provide at this stage.

    2. Preliminary Assessment Stage

    Secondly, a prospective buyer is likely to want to carry out a preliminary assessment of your business prior to incurring significant professional costs in relation to Solicitors, Accountants, Actuaries and any other relevant professionals depending on the nature of your business. This may include a preliminary visit to your business premises. It is likely to focus on the key assets of your business, future plans and projections and financial matters.

    3. Detailed Assessment Stage

    Thirdly, a prospective buyer is likely to want to carry out a detailed assessment of your business together with its solicitors, accountants, actuaries and any other relevant professionals depending on the nature of your business. This is likely to include a request for a significant amount of information and documentation. Typically, this will take the form of a lengthy questionnaire from the buyer's solicitors requesting information and documentation from the seller. Where additional questions arise from any information or documentation obtained or where insufficient information is provided, there may be further requests for information and documentation.

    4. Due Diligence Report Stage

    Fourthly, the buyer's solicitors are often requested to prepare a legal due diligence report for the buyer, highlighting any potential legal issues. The buyer will be particularly interested in issues that potentially affect the value of the target business and assets. Other professional advisers may be requested to provide similar reports.

    5. Warranties, Representations and Indemnities Stage

    Fifthly, the Business Sale Agreement is likely to contain a very long list of warranties together with representations and indemnities to be given by the seller to the buyer. The warranties, representations and indemnities have 2 primary functions (a) they allocate responsibility and risk between the parties (in so far as any failure of the seller to comply with them may result in a claim by the buyer against the seller), and (b) they act as a further level of due diligence by flushing out potential problems with the business. The business sale agreement will be the key transaction document and any warranties, representations and indemnities will usually be heavily negotiated between the parties.

    6. Disclosure Letter Stage

    Sixthly, on most business acquisitions, the business purchase agreement will contain a number of warranties (and, probably, representations and indemnities) given by the seller in relation to the target business and assets. Where this is the case, the seller will usually prepare a disclosure letter which qualifies the warranties (and, probably, some or all representations and indemnities) given in the business purchase agreement. The disclosure letter will be an important document given its relationship with the warranties, representations and indemnities. Accordingly, it will also usually be heavily negotiated between the parties.   

    By planning ahead, the seller can anticipate what information and documentation a buyer is likely to require before a buyer makes an enquiry in relation to or an offer for the seller’s business or as part of its due diligence exercise and what warranties, indemnities and representations a buyer may seek as part of the business sale agreement. Such preparation, planning and organisation is likely to make the business sale process more efficient and project the image of a well-run business. Consequently, it is likely to help the seller maximise its price and minimise its risk.

    It is important that the seller is fully aware of the information and documentation which it may have to present during the business sale process, that it can make that information and documentation available promptly if requested, and that the seller makes sure that it takes all appropriate steps to protect its confidential information.  Before providing any information or documentation to a prospective buyer, the seller should ensure that the prospective buyer enters into a confidentiality agreement. Ideally, the seller will have considered the way in which it will provide any information or documentation to prospective buyers in advance, having particular regard to the protection of important business information.

    Buyer due diligence is likely to cover a wide range of matters, including financial reporting, accounting and tax records, reviewing customer and supplier contracts, ensuring any key contracts are secure, reviewing and ensuring that any intellectual property is adequately protected, assessing human resources issues and securing key employees, addressing any property related issues and dealing with any governance, licensing and regulatory issues. Naturally, the due diligence list will be dependent upon the nature of the seller’s business. Before any buyer due diligence begins, the seller should be in a position to:

    (a) Show an efficient, organised and well-run business to any potential buyer;

    (b) Feel confident in its ability to present a clear and consistent picture of its business to any potential buyer knowing that buyer due diligence is unlikely to alter that picture;

    (c) Be able to respond efficiently and effectively to any reasonable requests for information and documentation from any potential buyer; and

    (d) Feel comfortable with its ability to deal with any reasonable requests for warranties, indemnities and representations from any potential buyer because the seller has already addressed any likely issues.

    The extent and nature of any preparation and planning for the buyer due diligence process will inevitably be dictated by the circumstances surrounding the sale of your business, including your reasons for selling and the time and resources available to you. It may be that you simply wish to sell your business as soon as possible and are prepared to make price concessions to take into account weaknesses or risks in your business. However, ideally, you will be able to avoid letting events outside your control determine when you must sell your business and you will be able to delay selling your business until you have carried out your seller due diligence process and prepared and planned for the buyer due diligence process in order to overcome weaknesses, remove or reduce risks and improve its attractiveness to potential buyers. The best way to avoid this is to maintain readiness and agility so that you are able to respond efficiently and effectively if an excellent opportunity arises to sell your business.

    During the sale process and, in particular, during the buyer due diligence process, surprises can quickly derail buyer-seller momentum and deflate perceptions of value. Self-review and ample preparation time enables the seller to maintain control and minimise disruption to ongoing operations. Effective planning and preparation also enable a seller to anticipate, understand, and actively manage unforeseen events better and to keep the sale process on track. Conflicting signals compromise credibility and effectiveness by creating confusion and doubt and may put off potential buyers or cause them to reduce the price that they are willing to pay.

    Typical Buyer due diligence issues

    Below is a list of some of the broad categories of typical buyer due diligence issues, which you may wish to consider as part of your preparation and planning for the buyer due diligence process. You are likely to have to consider specific issues within each category even if it is simply to assure yourself that you have no concerns with those issues. However, you should bear in mind that whilst many issues will be relevant to all or the majority of businesses, every business is unique, every business owner is unique and every prospective buyer is unique.

    1. Share ownership and corporate structure
    2. Corporate documents
    3. Licences and consents
    4. Insurance
    5. Powers of Attorney
    6. Disputes and investigations
    7. Defective products and services
    8. Customers
    9. Suppliers
    10. Contracts with the seller (or seller’s family)
    11. Material contracts
    12. Other contracts
    13. Finance and guarantees
    14. Liabilities
    15. Accounts
    16. Financial and other records
    17. Ownership of business assets
    18. Plant and equipment
    19. Intellectual property
    20. Information technology
    21. Data protection and privacy
    22. Employment
    23. Retirement benefits
    24. Property
    25. Environment
    26. Health & safety
    27. Compliance with the Bribery Act 2010
    28. Competition
    29. Tax

    Ultimately every decision to sell a business and every business sale is based on individual circumstances. There is value in most businesses so, if you wish to sell your business, there is always likely to be a buyer no matter what your reasons are for wishing to sell it. However, the earlier you create an exit strategy and start preparing your business for sale, and the more time you spend fine-tuning it for sale and preparing yourself for the buyer due diligence process, the better your chances are of maximising your sale price and minimising your risk. In order to maximise your return from your sale, you need to be in control of the process from start to finish, which requires detailed thought, preparation and planning. Determining your objectives, setting your goals and carrying out a thorough seller due diligence process and preparing yourself for the buyer due diligence process early on when selling your business and creating a viable exit plan and keeping it up to date means that you will be ready to take advantage of any good opportunity to sell your business.

    Need to talk?

    If you would like to discuss the buyer due diligence process, please contact us. We can help you to plan and prepare for the buyer due diligence process in a way that is right for you and your business.

    Whatever stage of the business sale process you have reached, we can help you to understand the business sale process, to choose the option that is right for you and to realise the value of your business.

    Contact us

    If you would like more information about selling businesses or would like to discuss a potential or existing transaction, please contact us by telephone on +44 (0)20 3126 4520 or +45 38 88 16 00 or by email at enquiries@orrlitchfield.com

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