Protecting Value Through Due Diligence

Nothing for 4 months and then 2 articles in 10 minutes - such is the sporadic nature of my blog writing;

How do you best protect the value of your business when travelling through the choppy waters of due diligence?

Achieving Heads of Terms is a big step forward but will be followed by a due diligence process where the pressure intensifies and the balance of power often shifts from seller to buyer. Badly handled, this can have a negative impact on value and potentially rupture the deal itself.

How can you best protect the value of your business during this critical phase?

1. Balance of Power

As a sale process enters due diligence there can be a dramatic shift in the balance of power between the seller and buyer. By accepting one offer you might have to refuse alternatives and run the risk of putting all your eggs into one buyer basket. Furthermore, having agreed terms with a buyer you then have to decide what and how to disclose commercially sensitive information as a buyer (or team of advisors) gets under the bonnet of your business;

2. Preparation

Good preparation will not only help to increase the appeal and value of your business, but it can also play a pivotal role in accelerating the due diligence process. Try to look at good preparation as a process of 'Advance Due Diligence' that helps avoid your deal getting bogged down with issues that could have been clarified and cleared up long ago.

- Make sure that all key customer and supplier contracts are in order and standardise if possible;

- Try to sell close too or just after year end accounts so your financial information is recent, relevant and accurate. Meet up with your accountant to gain an understanding about any anomalies within your accounts that might need explaining to a potential buyer;

- Tidy up any outstanding leases and/or make sure that your landlord will not create a problem or delay at transfer;

- Settle all disputes (commercial and personnel) well in advance;

- If selling a division of your business, create separate management accounts and provide clear information about exactly what will be going and staying.

3. Confidential Information

It's a delicate process to understand and appreciate what is and is not required by a buyer at any particular stage of the process. Whilst you have every right to protect your information pre-heads, being over protective through due diligence may be viewed unfavourably by the buyer and their team. They will ask for as much as possible and you will, understandably, want to protect commercially sensitive information.

The truth is, that to achieve a deal you will have to release some sensitive information so understand why they need what they've requested and protect yourself by insisting on a confidentiality agreement that will provide some level of protection and remedy against future leakage or misuse of information.

4. Exclusivity

Some buyers will request a period of deal 'exclusivity' to protect their position during due diligence. It becomes part of the negotiation as to how long and at what risk to you of potentially losing alternative buyers. Understand what they need to see, how long they require and create a schedule that provides you with some visibility and control of the process. You can release certain pieces of information in stages and depending on the balance of power within your process, you might also insist on a deposit.

5. Buyer Sincerity

Becoming comfortable with the buyer and their motivations is a key part of the entire sale process. Genuine and reasonable buyers will understand your anxieties and therefore all dialogue should be handled in a spirit of mutual respect. Remember also, that whilst the balance of power might shift towards a buyer they will be incurring cost in trying to achieve this deal so will also want to move swiftly towards completion. Be wary and questioning of those who drag out the process without obvious reason or explanation.

6. Momentum & Price Chipping

Time kills deals and delay can lead to fractures within the sale process and therefore opportunities to price chip and/or withdraw altogether. Achieving a price and structure at heads of terms does not necessarily mean those terms will be sustained through to completion - there is always something to play for and any problems that emerge during the process can lead to attempts by some buyers to re-negotiate terms.

7. Communicating with Staff

When and how do you communicate with the staff? If your business contains key employees then at some stage a buyer will want to conduct face-to-face interviews and discussions with the people involved. Ideally you've already communicated with senior management and achieved their buy-in but if not, you need to feel comfortable with the requests for access being made by the buyers and try to ensure that it's one of the final steps in the due diligence.

8. Retained Advisors

Moving from Heads of Terms to deal completion is not a straight forward process and as illustrated above, often requires delicate and experienced handling. It's at this stage of a sale process where we recommend that you retain an experienced advisor. Their knowledge of how to handle buyers and negotiate the due diligence phase will prove crucial in helping you protect both the value of your deal and at times, the deal itself.

[The views expressed in this article are generic and not based on any one particular business. We always recommend the use of professional and experienced advisors to assist with the due diligence process]

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