Considering selling the company? The practical point of view of preparing oneself for a successful due diligence process
If selling your company has crossed your mind, but you are not yet willing or found the perfect match to proceed into a transaction, you can still start preparing the company and yourself for the transaction process.
What is a due diligence review?
One essential step in the transaction process is the completion of so-called due diligence in the company. The purpose of the due diligence review is to verify the assumptions underlying the indicative offer submitted and create realistic expectations for the buyer about the object of purchase. The outcome of the review may effect, among others, on the transaction structure, determination of the purchase price and the seller’s possible liabilities towards the buyer. The purpose is, therefore, not only to identify potential risks or even deal-breakers involved in the business but also to present positive aspects and possible opportunities in the company; what will a possible buyer benefit from your company and its business, maybe even from your life’s work?
The due diligence review is generally conducted in the scope determined by the buyer, and it may concern either the entire company or only specific areas therein, such as legal, financial, technical, human resources, business, or tax matters. Therefore, it is best to prepare for these all.
What is the catch in a successful due diligence process?
Here are a few practical tips on how to prepare for the process even before it is on the table:
Organize the available documentation. Proper archiving is, unfortunately, often bypassed in a hurry. Therefore, take sufficient time and organize your documentation at least from the previous two financial periods so that relevant information is readily available. This includes, among others, all corporate resolutions, registration documents, business contracts with applicable general terms, and employment matters. The better the documents are organized, and the more complete they are, the better you are positioned for the due diligence review.
Evaluate possible risks and opportunities. To identify and evaluate matters needing further clarification as well as potential risks and opportunities before the transaction process is even initiated, conduct your own vendor due diligence review in the company, either internally or with external assistance. The results of such vendor due diligence can be very beneficial when presenting the company to a potential buyer. The results also help you to notice and fix any shortcomings before they turn to a deal or price critical issues in the deal negotiations.
Correct all possible faults and defects. As the results of the buyer’s due diligence review will have a material impact on the transaction, ensure that all identified faults or defects are corrected whenever possible and that the company is legally compliant before the due diligence process is initiated (e.g., prepare missing documents). A draft does not replace a signed document. If the signed documents are missing, find them.
Assign a team. Even if a full team is not necessary on the outset, consider who should be involved in the process. The due diligence process usually consists of a documentation review and interviews with the company’s management. The workload related to the due diligence process may, however, come as a surprise, especially as the business should nevertheless be run alongside as usual. In addition to internal members, external members such as legal or financial advisors or accountants may be necessary for the process.
Evaluate the best option for the data room. The due diligence material is stored in a separate data room, which is generally in a virtual form (such as a cloud service or even a USB flash drive). The best option for you depends on the amount and form of available material, and in certain events, even the assistance of an external virtual data room service provider is necessary. Data security should not be overlooked either when choosing the technical platform.
Ensure confidentiality. To secure the seller’s position in the transaction, it is better to be as transparent as possible in the due diligence process. However, sometimes this is not possible, and certain details may require hiding from the documentation, such as pricing, names of contract parties, or sensitive personal data. If hiding is not the option, agree upon sufficient non-disclosure before granting the buyer access to the critical details of your business.
The Due Diligence report covers the seller’s back
Every due diligence process is different, but the aimed result is the same: a clean due diligence report that will cover the seller’s back also after the transaction has been completed. The report itself is rarely available for the seller, but the seller can have its impact on the content by high quality due diligence material. With proper preparations, the seller can also allocate time to the actual negotiations and ensure that the terms of sale are favourable for it.
Well-handled due diligence can increase the possibility of a successful deal. When your own hands are not enough, external assistance can help tackle possible risks related to the process. NORDIA Law has assisted clients in number of transactions and created necessary tools in each of its Nordic offices for ensuring a smooth due diligence process. Therefore, in case of any questions, we are happy to be at your disposal.