Many readers will be very experienced in the subject of due diligence (“DD”) but this series of articles is derived from a presentation given at the Business Show at ExCel in November 2018 and is geared towards the sme business owner selling a business who has had little experience of the DD process. Anderson Shaw are business brokers specialising in the SME marketplace and offer business transfer agent support services throughout the UK.
This is the second in a series of three articles in relation to the DD process.
As a Seller always try to keep your end goal in mind. You made the decision to sell and you need to try to manage your way through this part of the sales process.
You should listen to the advice from your professional advisor team.
The final sales and purchase agreement (or asset sale agreement) is absolutely vital.
Everything that's gone before it is almost irrelevant
The Heads of Terms that were agreed and you signed, perhaps thinking they were legally binding, are now completely superseded.
If it’s not in the contract it's not part of the sale.
Try to keep things moving as quickly as possible because the longer the DD and legal stages go on, the greater the risk that the deal may be adversely affected by matters beyond your control.
Issues that are uncovered by the Buyers during the due diligence process might impact the purchase price or the warranties the Buyer requests from you in the sale and purchase agreement. Additionally, based on the results of their review, the Buyer might require indemnification and reimbursement for specified losses that they may suffer after the acquisition, resulting from the Seller’s historic operation of the business. When any issues are identified, the Buyer may negotiate for changes to the terms of the sale, such as reducing the overall price, or requiring a larger portion of the purchase price to be held back for a certain period of as security for any liability associated with the issue.
Ask your legal advisor to explain in detail about your disclosure letter; this is a major part of your insurance policy against things that may go wrong after you’ve sold. Much of the significant parts of your DD response should find their way into or be referenced in you disclosure letter. Your lawyer will easily earn their fee if they can make your disclosures as comprehensive as possible and so reduce your risk of a potential claim against you after you’ve sold.
If you can, review your business as if looking through the eyes of a potential Buyer, try to identify and correct any issues in advance of a transaction, this will save time and reduce costs at the time of the deal and help avoid concerns from any prospective Buyer.
Buyers today are fickle. They are generally risk averse and want to avoid problems. They want to avoid inheriting liability. And they’re expecting the Seller due diligence to be top notch.
You may think that different rules apply to small and large companies and to a degree that is correct; at the top end with the very largest businesses the level of DD can be extremely complex and may require large teams from both Buyer and Seller to be involved.
At the smaller sme end the level of DD does not vary that much from smaller sme’s to larger ones and the DD baseline is generally set quite high. To repeat again Buyers do not want to take on risk so they are almost always seeking a reasonably high level of DD to be completed.
As a small business owner you may say that you cannot possibly provide the level of DD response that a Buyer may want. You can try to negotiate around the actual level of DD, but remember if the Buyer is looking for comfort in different areas of your business and cannot obtain this from the DD, they will almost certainly ask for strong warranties and indemnities around these areas. This leaves the risk with you and the potential of claims after the sale has completed should issues occur. If the Buyer does make any claims under the SPA, this is the real worst-case scenario as the Buyer / Seller relationship deteriorates very quickly and the position becomes very adversarial with claims and counter-claims being made and legal costs being incurred and nobody (except possibly the lawyers) winning in the end. Businesses can get destroyed if this happens as the Buyer is more concerned in suing the Seller than running the business it has just acquired.
Your initial DD responses will most likely generate additional questions. Do not be surprised by this and there may still be further rounds of questions after these as well!
Buyers will almost certainly want to visit your premises (maybe more than one if you have several). During these site visits, their DD team will want to spend time with other members of your management team to get answers to some of their questions.
It’s also expected that the Buyers will identify some key individuals in your team who they see as important to the handover / transition process and may have them lined up for extended responsibilities after the sale. It is critical for the Buyer to have confidence in how they will manage the business after the sale and whilst they may agree with you some continued support / involvement it is to these other staff that they will look to place the greatest reliance. The DD team will no doubt be asked to speak with these key employees and make some assessment of their capabilities and commitment levels. This is where having your cover story straight is important and you will need to seriously consider bringing at least some of these employees into your confidence in respect of what you are proposing.
As business brokers, we at Anderson Shaw Corporate Finance Ltd, are always happy to advise business owners about any aspect of selling a business and the processes involved. If you are thinking of selling your business, now or in the future, please contact us for a confidential, no commitment conversation. We will be pleased to provide a business valuation and discuss your plans in relation to your business.