Although
the term “Due Diligence” (DD) applies to any investigation prior to signing a
contract & can even apply to a duty of care process, it is most commonly
used in respect of the evaluation carried out by a potential purchaser, before
an acquisition or significant investment.
It
takes many forms but is normally carried out by the purchaser directly, by
reporting accountants & or by the purchaser’s solicitors. There may well be
the need to involve other professionals, possibly including IT consultants,
property professionals, environmentalists & or an almost endless list of
possibilities, depending on the complexity of the businesses. Professionals in
each speciality are often employed by both parties, asking the questions, providing
responses, evaluating answers & asking follow up questions.
The
process is costly, almost always invasive & normally stressful for both
parties to the transaction. Not only is it true that most potential
transactions fail, it is also true that most transactions fail during due
diligence. Getting it right, which means effective & quick, is important to
both sides.
Top Tips for a Successful Outcome
Sellers need to prepare early. Preparing your business for sale not only includes
profit & value maximisation but also includes preparing the responses &
marshalling the data for those questions which it is possible to anticipate.
You can’t predict everything, but you can predict the obvious & can prepare
the data, trace the supporting documents & explain the anomalies before the
DD process has started, thereby reducing time scales, reducing stress levels,
impressing & supporting the purchaser’s confidence levels & improving
the likelihood of success.
There is no such thing as a “light
touch” due diligence. At some point
in almost every transaction, the purchaser will tell the seller that they have
instructed the professionals to carry out a “light touch” DD. But it never
happens. Even if the purchaser actually does ask for a light touch, the
professionals involved have to worry about their professional negligence
insurance & will place pressure on the purchaser to allow them to carry out
an extensive investigation & however well intentioned, most purchasers will
follow the strong advice given by their advisors.
Choose your professional advisors
carefully. This tip is important for
both purchasers & sellers. Almost every professional adviser will claim
that they are experienced in DD work, although many aren’t. Always ask
questions & seek examples of previous work. Expect a firm to have
specialist partners & if they don’t, wonder how much DD work they get
involved in. Meet the other members of the team, as it is they that are doing
most of the work & interfacing with the other parties in the transaction.
As well as ensuring that the advisers are experienced in DD, ensure that they
are not too big for the scale of this transaction – you will save money &
improve the likelihood of a successful outcome.
Respond quickly, respond accurately
& document everything. Not only
does the DD process help the purchaser to maintain (or even improve) confidence
that they are doing the right deal at the right price, the answers will have a
direct impact on the wording of the Share Purchase Agreement & in
particular, the warranties & indemnities. Wherever possible, you should
also take notes & then confirm all conversations with a written record.
Manage the professionals. Again, this is equally important for both purchasers
& sellers. If properly chosen, the professionals firms should be experts in
their field, but are unlikely to be experts in your field. Equally, the professional
people that are asking the questions & possibly preparing the responses are
likely to be more junior & less experienced than you might expect. Many of
the questions will reflect their lack of experience & lack of
understanding, as will many of the answers. Even when the questions are
“sensible” & the answers accurate, there is lots of opportunity for the
professionals to misunderstand the responses or misinterpret the implications.
Both purchasers & sellers need to keep a close eye on their respective
advisers, to anticipate “ill advised” questions, clumsy answers & mistakes
in interpretation. Check everything & don’t allow the often understandable mistakes
to get in the way of the transaction.
Love the other side. Every sales process that involves an extended gap
between agreement & completion suffers from a phenomenon called “buyer
remorse.” Well known to both new car sales personnel & estate agents, the
purchaser begins to regret the decision to buy & these feeling of remorse
are exaggerated by the length of the time scale involved. With a company sale,
the room for buyer remorse is exaggerated by the extended time scales, by the
DD process & by any changing circumstances, whether it be the target, the
purchaser, the market or the economy
that is changing. Whilst the purchaser is experiencing “buyer remorse”, the
seller may well be experiencing “seller remorse”, a phenomenon that probably
only occurs with sales of personal property, be it a house or a business. When
you add in the particular invasive issues around DD exaggerated by the
commitment to fulfil the DD process whilst continuing to manage a business, it
is little wonder that seller remorse is such an important issue in every
transaction. The solution is for both sides to meet often, empathise with the
other’s issues & look to resolve problems before they become barriers.
Hang Tough. Most transactions experience problems & any
issues are exaggerated when they are applied to family businesses where the
emotional attachments are that much greater. By keeping the focus on the end
result, a business that has been professionally prepared for sale & which
is fully supported through DD will come through & realise real value for
the vendor & for the purchaser
Bob Drew is a Commercial FD with over 30 years’ experience in
business. Having bought several businesses & sold a few, Bob has lived
through a significant Exit when a large family business was sold to a private
equity firm. The above Tips are borne of experience – they are not lifted from
a text book.
