We’ve already explained that buyers are likely to be more exacting when carrying out due diligence on target companies. One way to ensure you come through this exercise with flying colours is to do your own due diligence, known as ‘vendor’ or ‘sell-side’ due diligence. This allows you to spot and solve problems before you let the vendor loose.
If you’re a company owner with a bit more time on your hands and you’re planning a future sale, now is a good time to carry out vendor due diligence.
On the sale of any company, some level of due diligence will always be required. This can vary from basic financial information, if the company is being sold, to the existing management team, up to a raft of questionnaires being submitted by a team of specialists appointed by a Buyer. The better prepared you can be for any due diligence exercise, the stronger your position will be. Getting a head start on due diligence will also save valuable management time when a deal process gets going, which will in turn help to keep a deal on track to meet key deadlines.
Carrying out your own vendor or sell-side due diligence is beneficial not just in respect of an eventual transaction; a due diligence process also provides the opportunity to assess current practices, identify any weak spots and sort out those problem areas. If you do later start an exit process, you will be glad to have solved these issues - what is often a fixable problem 12 months before a sale can easily lead to a reduction in the purchase price if the issue is spotted too late in the process to resolve it.
The starting point for any due diligence is the due diligence checklist – a questionnaire that raises queries on all aspects of the current and historic operation of a company.
In carrying out vendor due diligence it is important that the questionnaire is wide ranging and covers all facets of a business, not just those you deem relevant. A potential buyer will likely take this wider approach. With this in mind, you must be able to demonstrate that you have considered any and all topics that a potential buyer may be interested in. Even if an issue is irrelevant, you need to explain why.
Some of the questions on a due diligence checklist will require narrative answers, others will involve providing copies of relevant documents.
On seeing a question that asks for a copy of a document or a schedule of information it is easy to assume that you have the relevant records, or that you will be able to generate the correct reports when it comes to the point of a sale. However, it often transpires that records are incomplete or the report doesn't contain all of the information required.
When assisting our clients with vendor due diligence we recommend that clients go through the process of pulling these documents and reports together, with our help, to start to build an online data room that contains copies of all relevant documents. This can be as simple as using DropBox, ramping up to a platform specifically designed for handling a due diligence process.
When compiling a data room, the key principle is to keep things organised. A clear folder structure and document naming convention that corresponds with the checklist will save the buyer and any advisers time when reviewing the due diligence. It will also help present the picture to a buyer that the selling team is organised, serious and has been thorough in preparing the due diligence information. All factors that can make a sale process more efficient, saving time and costs in the long run.
Having answered the questions in the checklist and compiled the relevant information, the next step is to look for any gaps or problem areas.
Common problems that are picked up in a due diligence process include:
Having identified those areas where there is room for improvement it is important to maintain the momentum, get any issues resolved and update the due diligence checklist and data room. Having done the initial work of completing the checklist, it is easy to let the remedial action slip to the bottom of the list as the work has no fixed deadline.
Once the immediate problems have been rectified and new processes put in place, in order to maintain the benefit of a vendor due diligence process, the checklist and supporting documents will need to be periodically reviewed and updated where relevant.
We know the questions buyers will ask (we ask them when we’re acting for buyers). We will therefore act as devil’s advocate - we will be probing and asking the questions that will find the gaps.
We will guide you through the questions and help you prepare the narrative answers, prompting you to include more information where it may better explain the situation to a potential buyer.
We will also highlight areas that are likely to concern a buyer and assist with any actions required to address this.
To the extent any gaps are identified in your business, we can assist with putting in place new contracts, policies or procedures to ensure that your company is presented as well as possible, ensuring the buyer has confidence in your business from the very start of the sale process.
For more information please email: laura.guest@roxburghmilkins.com.