From the very start of the due diligence process, many company owners who are in the process of selling their company feel immense pressure to coordinate due diligence and run a successful business at the same time. An accelerated and streamlined due diligence process can be key to easing this pressure.
Below we have outlined 4 points to assist with the due diligence process:
The due diligence process is usually kicked off by receiving the due diligence questionnaires from the buyer’s advisors. There are various types of questionnaire (legal, financial, commercial etc.) depending on which area the questions are focused on and sellers are often required to respond to them in stages. The first stage is commonly financial and tax due diligence, followed by legal, possibly technical and commercial due diligence.
It is paramount that the sellers’ professional advisors have input on the replies. This allows them the opportunity to review the questionnaires and ensure the questions are tailored to the target company and the industry in which it operates. The extensive length of these questionnaires can easily cause frustration amongst the sellers and that is why the advisors should ensure that no unnecessary and/or duplicated questions are being asked.
One very common mistake sellers make is that they do not give sufficiently detailed information in their replies to enable the buyer to form an accurate overview of the target company. The reason for this might be lack of patience, time or the involuntary assumption that the company information, that is so much like second nature to them, is also known to the buyer. We often advise sellers to place themselves in the position of the buyer and assess whether a clear overview of the target company has been given through the replies. Providing complete and accurate information on the first round of due diligence enquiries is most certainly going to decrease the volume of any further enquiries raised by the buyer thus speeding up the whole process.
Another slight oversight that sellers make, through no fault of their own, is checking the consistency of the information provided. The mammoth task of compiling information from different departments within their business can sometimes lead to inconsistencies in the information provided. Moreover, the sellers must ensure that the information gathered whilst putting together the replies remains accurate at the moment this is sent to the buyer. The business is a moving target and that must not be overlooked!
Building a complete puzzle from the first set of due diligence enquiries will ultimately lead to a less expensive and time-consuming due diligence process.
Sellers who are unfamiliar with the mergers and acquisitions process will be uncomfortable disclosing areas in which the target company does not really have (but ought to have) sufficient records or requires sellers to disclose negative information regarding the target company. Their conflict lies between the desire to close the sale at the best price possible and providing the buyer with an accurate overview on how the business of the target company is run day to day.
The best way to navigate through this predicament is with the assistance of the advisers. They will provide advice and options on how to deal or correct the negative or the missing information that the sellers have identified. They will also lead the negotiations with the buyer’s advisers in relation to potential actions to be taken by the sellers to rectify the issues identified.
Choosing advisors who can manage a lot of the due diligence process for sellers is also key, especially when running against a tight deadline. The right advisers will act proactively and filter the information at all stages. As mentioned before, they will filter the questions to ensure they are tailored to the target company and, once answered, will filter the replies to strengthen their coherence before sending them to the buyer’s advisers.
Having advisers who are familiar with the industry the target company operates in is also a great advantage because every due diligence is different depending on the industry it relates to. Experienced advisers will have a strong degree of understanding of the legal and commercial requirements of the industry in question and, as such, be able to pre-empt the buyer’s areas of focus during the due diligence exercise and its concerns regarding handover and integration.
These are just a few matters which we hope can join your list of considerations before embarking into a due diligence process. If you have any questions, please do not hesitate to contact Claudia Mihai.