Due diligence is the process the potential acquirer goes through, usually with a raft of analysts, accountants, lawyers, and the occasional industry specialist advising.
It is normally an extremely extensive check of all aspects of the business, can be time-consuming and stressful, and happens while you still have a business to run.
Advance preparation is essential as it will reduce the workload, give confidence to the acquirer, reduce professional fees and make attempts to reduce the offer price less likely to succeed.
The acquirer needs to know whether what they have been shown is supported by fact. They’ll look at any papered- over omissions and whether the hopes and expectations for future profits are realistic. While appearing to be similar to an audit it can be far more comprehensive and onerous.
The starting point for due diligence is the data room. The data room is a collection of everything that is relevant to the past, present and future running of the company. It will normally include at least:
- Corporate articles and minute book
- Property deeds and leases, fire certificates, environmental reports
- IP registrations – patents and trademarks Product specifications
- Fixed asset registers
- Insurance – property, employer’s liability, product liability, vehicles, business continuity, etc.
- Customer and supplier contracts
- Debtors and creditors loan agreement and liens search
- Employee contracts and details including pension and severance obligations
- Statutory and management reports for the last three years, budgets and forecasts
- Audit letters and recommendations
- Detailed accounting policies and procedures Employee Deductions, GST/PST/HST and corporation tax returns and any compliance visits or CRA audits
- Bank accounts, loans, mortgages, foreign currency (or hedging) and interest rate exposure
- Commitments and contingent liabilities
Depending on the nature of the business there could be much more.
Do not underestimate the pressure that will be placed on you and the senior team, especially finance, during a sale.
It takes a thorough understanding of the business to know what belongs in a secure data room and significant time scanning documents or copying files to set one up. It should, therefore, be part of the exit planning process to create, over a period of time, a repository for all these documents (in soft copy as the data room will ultimately be a virtual, online room).
In addition to being prepared for the due diligence process, the act of putting a data room together will identify what records do not exist or where copies are missing. It also highlights areas where attention is needed – perhaps a lease needs to be reviewed or IP registered.
The actual sale process can be disruptive for staff and anything out the ordinary can create concern and rumors. A low profile gathering of data will become accepted practice whereas a flurry of activity looking for missing paperwork is likely to disturb the office workforce in particular.
Finally, do not underestimate the pressure and resources required from you and your senior team, especially in finance. Anyone who has been through the process will tell you that they never expected it to be so onerous.
There is a real danger that focuses on the sale process will take the effort away from running the business. It might be advisable to bring in professional assistance to project manage the transaction internally to minimize the impact on the senior team.
Not all offers for businesses go all the way to completion. The worst scenario for a distracted team is to have the business slip and then suffer the emotional backlash of a failed sale; particularly having adjusted to a probable change in ownership and management.
A successful exit can be very rewarding, so planning it is critical to maximizing that reward.
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