Selling a business can be a long and complicated process. One of the more strenuous and time-consuming aspects of selling a business is the due diligence process. Assisting with a buyer’s due diligence can take a significant amount of resources while still trying to run your business. Accordingly, once an owner decides to sell its business, or plans on selling its business in a few years, one of the next steps should be to conduct pre-sale due diligence. Doing this in advance of negotiations with a buyer has three advantages:
- It gives the seller and its counsel an opportunity to make a critical review of the business and could allow time to remedy any items which would give a potential buyer the chance to ask for a purchase price adjustment.
- By having the due diligence materials organized and ready, the buyer’s due diligence will go smoother and faster and the business will appear professional and well-run. It is well known that time kills deals and you only get one chance at a first impression. Both a quick closing and a good first impression can be achieved with pre-sale due diligence.
- Since most of the hard work will be done, the seller and its team can focus on the negotiations and running the business instead of being sidetracked by constant requests for information and questions regarding deficiencies in the documents produced.
Many sellers are surprised when they receive several pages of due diligence requests from a potential buyer. But this
is the norm; the buyer and its counsel will want to receive and thoroughly review the company’s material documents and records. Here are some examples of areas that need to be considered.
The first items the buyer’s counsel will request are the company’s organizational records, including the articles of incorporation, bylaws, stock record books, board and shareholder minutes and resolutions. A seller should review these documents and make sure they are complete and up to date.
A seller (or specialist) should review employment and consulting agreements and employee benefit plans to ensure compliance with current laws. Furthermore, if intellectual property is material to the business, appropriate confidentiality and intellectual property assignment agreements should be signed by relevant employees.
Real Property Matters
If the business owns real property or leases material real property, important documents should be gathered and organized. These documents include the deed, lease agreement, title insurance policy, mortgage, survey and any environmental reports.
In preparing for a sale, the company should organize all of its material contracts and make sure executed copies are available for review. If any contracts are unfavorable, determine whether they can be terminated or renegotiated. If favorable contracts are set to expire, attempt to renew them so the third party won’t use the deal as leverage to renegotiate the contract. Check for any contracts that will require consent to assignment of the contract to the buyer. Such consents will need to be obtained prior to closing and can be prepared in advance.
Create a summary of intellectual property used in the business and make sure that ownership to the registered intellectual property is in the name of the seller.
A seller should analyze any pending litigation or current disputes with customers, suppliers or other third parties, including past litigation matters. If possible, attempt to resolve these matters. A good explanation should be prepared to explain any trends, and if possible, demonstrate steps that have been taken to reduce potential litigation going forward.
A seller should have complete copies of insurance policies available and should review the insurance coverage to ensure the appropriate type and amount of insurance is in place.
A good way to prepare for a buyer’s due diligence request is to ask your mergers and acquisitions attorney for samples to get a feel for what a potential buyer will request. Another approach that will contribute to a smooth due diligence process is to set up an electronic data room that can be accessed by potential buyers. An electronic data room could even help in day-to-day operations, well in advance of any negotiations.
The saying “a strong offense is the best defense” is an apt expression for pre-sale due diligence. In conducting a pre-sale due diligence process, you will be defending against a buyer’s attempts to reduce the purchase price by uncovering issues in its due diligence.
If you are considering selling your business in the future, feel free to contact us. We would be happy to meet with you on our dime to walk through the due diligence process and other issues that may arise in a sale transaction.