Sale Side Due Diligence in Mergers and Acquisitions For the Business Seller

There comes a point in life and commerce when it is time to sell your business. You have run the business for many years, and now you have chosen to sell, or perhaps you have intentionally built up a business with the goal of acquisition. As a business owner, selling your business is a significant event. The stakes are extremely high. A successful deal is likely to yield significant financial rewards. A failed sale will generate wasted time and expenses. Make no mistake – the sales process is complicated. Even the most successful and experienced business owners may find themselves unprepared for the multifaceted challenges that face them during the sales process. And rarely, are lawyers, and accountants alone able to bring in the right expertise and experience to perform the best due diligence.

But you say, “That’s all great but isn’t the buyer supposed to be the one doing their due diligence on me? Why do I need to do their work?”

Good question. A few points we can agree upon is that you want to get the most for your business and you want the sale to be as painless as possible. The ideal is at 9:00 am someone comes in and hands you a check for your business, and you sign a few papers, and you are out with the money by 9:15 am, at the latest.

Yes, of course, that is farcical, but with proper sale side due diligence packaged professionally, and correctly prepared, the sales process will be more efficient, professional, and usually, empowers the seller to command a higher selling price. This is based on the simple fact that buyers do not want to be surprised so they take their time to learn as much about your business as they can. So when they are ready to buy, they know exactly what they are being sold. It is to your benefit that you become a buyer’s guide to the knowledge needed to understand your business and how you have run your business. You want to remove any doubts or even suspicions that you are sloppy or possibly deceitful. As in business as in life, all imponderables are resolved to the negative. You must take the time and care to retain the professionals and prepare the materials to educate a potential buyer and remove any and all imponderables.

For example one of the first steps is norming the financials. Most private businesses are run on the cash method of accounting, and most business buyers are used to financial statements constructed in accordance with the accrual method. Also as a business owner, one may have taken some liberties to enjoy the use of pretax money for example, let’s say a business car or some business trips that may not have been exactly related to the business. This is normal. However, these sums need to be added back into the prepared accrued financial statements – and must be well footnoted. The norming and recast financial statements should be done by a qualified CPA or Chartered Accountant. And ideally reviewed by a subsequent financial expert to make sure it is done properly.

A comprehensive review should be conducted on of all of the business’s foundational documents and key agreements. We have seen a company that has not held shareholder meetings let alone board of directors meetings in years even though the charter documents and by-laws require such meetings. Again this is nothing new or surprising. As the business owner, you just need to ensure you get yourself back into compliance. When reviewing the documents look for any “triggering events” or “prohibitions.” An example might be a loan or supplier credit that can be called in full or cancelled, or a lease agreement upon a material change in ownership. These provisions are not intended to block your sale. They are in place to protect the counterparty to the agreement from conducting business with someone unknown to them. As the seller, reach out to the counterparties and ask what might be needed for these agreements to remain in force or what it might take to craft new agreements for the buyer.

Intellectual Property and Critical Information (IPCI) are typically the most valuable assets in any purchase. IP (Intellectual Property) are the intangible assets such as patents, trademarks, copyrights, trade secrets; and CI (Critical Information) are generally all of the information you do not want your competitor to have such as your marketing plans, lists of customers and suppliers. There should be a complete list of the IPCI assembled and documented for the buyer.

There are several other steps that should be taken but these measures become more specific to a business and an industry and are not suited for an article on general awareness of sale side due diligence. While outside of the scope, a few examples would be if your business is subject to OSHA or EPA regulations? If so, a review of licenses, permits, testing, and correspondence should be assembled.

What does sale side due diligence really do for the seller?

The presale efforts improve the accuracy of financial statements. It provides the buyer with a transparent and credible view of the business, and it maximizes transaction value by creating trust and eliminating imponderables. It also protects the seller with facts. By putting all the facts together, clearly, and up front, you can both mitigate delays in closing the deal and potential pitfalls that lead to costly litigation.

While all closings for the sale of your business must involve legal counsel, attorneys more often than not merely practice what they know, which is they protect their clients with contractual language – not the facts. Proper due diligence protects you with facts effectively laid out. And perhaps most importantly, the due diligence process adds the power of facts to empower your counsel to most effectively defend you should any claims arise from an upset buyer.

In all of the sale side due diligence reviews we have conducted, we have found material issues in about 50% of them. We found surprises, which if not addressed, could have been deal killers. Surprises that included the failure to pay patent maintenance fees, thankfully fixed; rent unpaid at several prior locations, even an accusation that one engineer kept hiring female temp works so he might be able to date them. These issues were dealt with and corrected before the businesses were put up for sale.

One of the most interesting sets of issues arose from a round of funding the business secured through a crowd-funding platform. The problems from the crowd-funding campaign took many months to resolve – but they were resolved. It is not that the sellers are ignorant of their past, the sellers were just comfortable with the past. Sale side due diligence raises the issues, allows the seller to address the issues before the buyer steps in for a look.

Sale side due diligence is a little like your mom’s dating advice that includes suggestions such as; comb your hair, brush your teeth, and be yourself. To a degree this is true with sale side due diligence. You want to put you very best fiscal foot forward. To do that you need to know what a buyer will be looking at, what they are looking for, and what will turn them off. Nothing turns a buyer off quicker then a list of imponderables and surprises.

Prepare the sale side due diligence disclosures, proactively, and do it right the first time so that you are ready to meet the investors and ensure optimal pricing for the sale.

If you are considering, or in the process of selling your business, please reach out to us, and we would be happy to see how we can ensure you get the best deal possible.

Click here to contact us.

Back Scroll Up