While most business owners looking to sell are aware of the due diligence process, most remain blissfully naive as to exactly how painful that process can be.
Preparation and strong research are always more productive alternatives to painkillers – and they’ll ensure the process is as smooth and speedy as possible.
Here are five tips to help you avoid the due diligence headache.
1. Spend some to save some
It’s highly advisable to pull together a team of experts to help you with the process, including a trusted financial advisor and a solicitor. It may seem like added and unnecessary cost, especially if you’ve sold businesses before, but an investment at this stage could save you in costly disputes and litigation further down the line. Even weathered veterans and thick-skinned salesmen have been caught unawares during the due diligence process.
Your team of experts will help you do your due diligence prior to coming under the scrutiny of a buyer’s close inspection. They will also know all loopholes and potential traps – even overlooking something that seems insignificant could be costly during the negotiation stage.
2. Enter into a confidentiality agreement
During the due diligence process, potential buyers access all the information required to come to an agreement. This includes potentially confidential information – so always avoid the risks and enter into a confidentiality agreement before you get started.
As a minimum, you will want a confidentiality agreement that will require the purchaser and its advisers to:
- Keep all disclosed information confidential;
- Take all reasonable steps to keep it safe and secure;
- Disclose the information only to those employees and advisors who need it for the transaction;
- Use the information only for assessing the prospective transaction; and
- Return all documents (including copies) at the seller’s request, or at the conclusion or termination of negotiations
3. Understand any potential issues
Foreseeing the potential issues and rectifying them can save you a lot of time and money further down the line. From a legal perspective, some issues have been found to come up time and time again. Examples of these include:
- Inadequate documentation for customer and supplier contracts;
- Inappropriate employment contracts for key members of staff;
- For intellectual property-rich business, (such as those that develop software), inadequate evidence that the business owns/has the right to use the IP;
- Dilapidations liabilities on leasehold properties which have not been provided for; and
- Irregularities with share capital, where legal formalities have not been complied with
4. Collaboration not confrontation
The best way to incite confidence in a buyer is to invite them to see everything about the business – if there is something to hide, their lawyers will find it, so being totally transparent from the beginning is always best practice. A seller who is unable or unwilling to provide information when asked is likely to either drive a potential buyer away or enter into a lengthy and expensive confrontation.
5. Employees matter
The success of your business can often be defined by the people who form it and in many instances a prospective buyer will want to ensure certain key employees are retained post-acquisition. This can be tricky, since discussing your plans with your employees could be risky, as it’s often best to keep the number of people who know your plans to a minimum. However, planning for what happens post-sale and entrusting they help of key players will go a long way towards ensuring your company retains its culture and your employees remain happy.
It’s also important to understand the limitations of due diligence. Due diligence can’t spot the workforce or the culture of the company, nor can it predict how these factors will be affected by new management. It is likely that prospective buyers will have this fact in mind and will be looking at the quality of your employees, as well as the legalities behind the day-to-day running of the business.
Sophie Turton is assistant web editor for Crunch, an online accountancy firm for small businesses, contractors and freelancers.
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