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Surviving the Due Diligence Process

So as a business owner you have decided to sell your business to either move on or retire. You are keen to achieve best value for your business and have engaged LINK to manage the sale process.

Fast forwarding then, your business broker has gone about managing the sale of your business in a planned and orderly manner. (Refer to our LINK publication entitled “Managing the Sale of Your Business”). They have appraised the market value, prepared a comprehensive Information Memorandum setting out the relevant detail of the business, marketed the business widely to attract suitably qualifi­ed buyers, arranged for interested parties to meet you and view the business, and negotiated a conditional Sale and Purchase Agreement on acceptable terms with a suitably qualifi­ed buyer. 

Having signed the conditional Sale and Purchase Agreement you might think the deal is almost done! Not so! This is usually when the detailed work begins. The buyer will want to verify the information already supplied and review any additional information not previously made available due to commercial sensitivity. 

I recently concluded two business sales each being subjected to an in depth due diligence process. One buyer was in business banking and contracted the process to his accountant, and the other an experienced senior executive for a large corporate who conducted the process themselves. Examples of the sort of information requested were:

Financial: 
- Financial statements, taxation returns and GST returns for the past three years 
- Management accounts to date since last balance date 
- Stock records, age and condition and method of valuation Details of receivables and payables and aged analysis 
- Borrowings and indebtedness 
- Insurance matters 
- Litigation, arbitration and other disputes 

Human Resources: 
- Employees, contracts and remuneration entitlements 
- Position descriptions, CV’s, performance, length of service and attendance records 
- Detailed wage and PAYE records 

Customers: 
- Details and categories of customers 
- Business reliance on key customers 
- Any customer contracts and are they transferable 
- Reputation of product and services 

Suppliers: 
- Details of major suppliers, trading terms and credit rating 
- Contracts for supply or agencies and are they assignable 

Compliance: 
- Health and safety procedures and accident history 
- Environmental matters 

Assets, Plant & Equipment: 
- Property, location and lease details 
- Details of tangible assets including plant machinery and equipment 
- Review age, condition and value 
- Intellectual property rights 

Market Information: 
- Major competitors of the business 
- Strengths and weaknesses of the business relative to competitors

Business Systems and Software: 
- System documentation 
- Operational procedures.

Altogether around 130 pieces of information were requested for each business all to be satisfi­ed within 20 working days of the date of the agreement. The second buyer met with the owner twice a week for a period of over a month to go through this information. 

Remember you still have to operate the business as usual while this process is going on and at ­first it may appear to be a formidable task to bring all this information together. This is where your broker can help. In these examples I acted as the go between to facilitate the transfer of information between vendor and purchaser so as to maintain momentum and minimise disruption and expense. 

In my experience, some of the things that helped the process along were: 
- Requesting the buyer to provide a detailed schedule of the information required 
- Staying in the middle to facilitate the exchange of information between the parties 
- Ensuring all the information requested and to which the purchaser is entitled is provided 
- Maintaining regular communication with both parties and their advisors 
- Following up and responding to additional questions promptly and accurately 
- Exercising patience, persistence and objectivity at all times 
- Managing the process through to confi­rmation to avoid the need for extensions of time. 
- It is important that vendors work closely with their broker to maintain the buyer’s confi­dence in the business throughout the due diligence period to bring the sale to a successful conclusion. 

I am happy to report that both of these deals were con­firmed within the 20 working days provided for due diligence and resulted in successful sales, satis­fied clients and customers.

Written by Barry McFedries

LINK Christchurch