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Due Diligence Preparation

When you and your acquirer have agreed with a sale price for your business, your solicitors and your acquirer’s solicitors will draw up a Heads of Terms document. The Heads of Terms is a broad outline of what the final sale and purchase agreement (SPA) will contain – the SPA is the legally binding contract covering your responsibilities as the seller and your acquirer’s responsibilities as the buyer.

There will often be differences between what’s in the Heads of Terms and what’s in the SPA. More often than not, these differences will be because of discoveries made by the seller during the due diligence process.

What Purpose Does Due Diligence Serve?

The due diligence process is there to protect the acquirer. It allows them to know everything they’ll be buying when they take over your company – your intellectual property, your staff, your customer database, the relationships you have with your suppliers, and more.

During the discussions leading up to the handshake between you and your acquirer, it’s impossible to cover in granular detail every aspect of your business. You will have been honest, transparent, and truthful with your acquirer on the broad strokes of the deal but, from the point of view of the acquirer, there may be hidden landmines in your business that you are not aware of.

Those landmines may cause the acquirer to lower their offer or to abandon the deal completely.

The due diligence process is fraught with complexity and complications. When you engage IBA Corporate as your business broker, we work with you, your accountants, and your solicitor to ready you for the due diligence even before we have begun to seek an acquirer. What will we be helping you to prepare for the due diligence process?
Why you need to be ready for Due Diligence?

Your Due Diligence Checklist

Depending on the size of your deal, your solicitor or your acquirer’s solicitors may wish to set up a “data room” – this is often a security-protected room in which all due diligence documentation is kept for inspection. The acquirer’s solicitors visit the data room to get the information about your company they then provide to their client.

On smaller deals or when a solicitor has an online portal set up to provide this service, due diligence documents will be kept on a password-protected secure server.

Your IBA Corporate representative will gladly inspect the due diligence documentation bundle as it is built and they will provide guidance on any further information they believe a future acquirer may need.

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What's In The Checklist?

Upon engagement with IBA Corporate, we recommend strongly that you, your solicitors, and your accountants start to assemble the following:

Financial Statements

Company Documentation

Company Heirachy

Intellectual Property

Business Contracts

Legal Disputes

Dept Facilities

Compliance Requirements

The Checklist In More Detail

Upon engagement with IBA Corporate, we recommend strongly that you, your solicitors, and your accountants start to assemble the following:

During the negotiations, you will have informed the acquirer of any ongoing debts your company has like a commercial mortgage, a lease arrangement on plant or equipment, a working capital loan, and so on.

With most takeovers, all current debts are usually settled in full by the acquirer post-takeover and this would normally have been factored into the agreed price. Please note that if you have an overdrawn director’s loan account, it is in your best interests to settle this in full prior to the completion day. Even if the takeover is successful, there is no guarantee that your acquirer has the skills, patience, or funds to keep the business afloat thereafter.

If your director’s loan account is still on the books if your company enters liquidation post-takeover, there is a very high likelihood that the insolvency practitioner will pursue you for repayment of the director’s loan

Your acquirer will almost certain expect you to keep management accounts. Management accounts, normally produced monthly, keep track of the financial and operational performance of your company.

They are particularly useful when growing a business or running a business experiencing temporary difficulties because they provide up-to-date and accurate information which assists you in strategic decision-making and in the day-to-day running of your business.

If you currently don’t run management accounts, ask your accountant to start doing so. You may also wish to ask them to produce retrospective management accounts for at least the previous 12 months so that they are available if asked for by the acquirer’s representatives.

Your acquirer will also expect to see your full accounts going back for at least three years. In addition, as many companies have moved over to online bookkeeping and accounting, you may be asked to provide guest access to the acquirer’s accountants.

Your acquirer’s professional representatives will often require a review of your current tax position as well.

You will need to make sure that all statutory records and registers are up to date and that the shareholding structure is documented and clear.

You will also need to provide records of any historic share transactions and to prove that no third-party permission is required for the sale of your shares in the business.

You should prepare an organogram for the due diligence process – an organogram shows the names of the people working for your company together with their responsibilities and where they fit into the decision-making structure of the business.

Most acquirers want to know that your business is not completely reliant on your presence for it to function successfully. An organogram together with career and responsibility details in depth about each member of staff, particularly management staff, will assuage worries an acquirer might have about being required to run your company when the takeover has happened.

The information you provide on employees must give the acquirer confidence that the staff they are acquiring when they purchase your company are competent and they have the necessary skills required to perform their role or roles.

They will also want to know of all commission and bonus structures together with any promises (individual or collective) about future pay rises or promotions for staff. In most cases, you will need to produce a list of all former employees including their start date, their end date, and the reason they don’t work for your company anymore.

Intellectual property are the intangible assets owned by your company and from which your company derives financial or operational benefits including but not limited to any patents, trademarks, the name of your company, your website domain name, industrial design rights, database rights, and so on.

You will need to demonstrate the company’s effective ownership of all intellectual property ideally by the registration of that intellectual property with a governing body or through successful legal action taken against other parties using your intellectual property without your permission.

During the course of business, your company will enter into multiple contracts with suppliers like your landlord, your payment processor, your accountant, and other parties. Many of those contracts will carry a minimum term and your company will incur a penalty charge if it unilaterally breaks the contract of supply.

Your acquirer may wish to end some of these contracts and, if ending those contracts early attracts a penalty or legal action, they may seek to reduce the price they pay for your business accordingly.

Your acquirer will need to know all past disputes with customers, suppliers, government agencies, and employees and how they were resolved. They will need reassurance that these previous disputes will not flare up again and they will need guidance from you on how to prevent any previous dispute from resurfacing.

They will also need you to tell them of any potential disputes in the future and where those disputes may come from.

 

You should also have to hand evidence that you are meeting all compliance requirements expected of your company including but not limited to:

• general regulatory compliance

• data protection

• customers

• foreign trade regulations

• Gender Pay Gap

• anti-bribery and corruption

Keeping Documents Up To Date

You should keep your due diligence documentation up to date every month. Due diligence can go on for months and you will often find that, if the acquirer’s professional representatives request the same documentation again two or three months after their initial request, the details have changed.

When Due Diligence Is Underway

When due diligence is underway, you may receive an avalanche of requests for documentation within a short space of time from the acquirer’s professional representatives and then receive requests for nothing for two to three weeks afterwards.

There will be times when you are frustrated by the due diligence process. There may be other times when the behaviour of the acquirer’s solicitors is aggressive and you feel that your honesty is being questioned.

Try not to take any requests, no matter how curtly worded, personally. Your acquirer’s solicitors are trying to protect their client’s interests.

Please do not forget that it is your job, through due diligence, to provide guidance to the buyer on what exactly he or she is buying. Being vague in your responses or not responding at all introduces doubt into the mind of the acquirer and their professional representatives – it will harm the credibility you have built up and imperil the deal.

By keeping your documentation up to date, you to provide the acquirer with the information they need, you’ll retain their confidence, and you’ll move one step closer to completion day.

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