How to Prepare for Due Diligence
Three primary tasks need to be accomplished after a buyer has signed a letter of intent (LOI) and before a sale transaction is closed:
• The attorneys must prepare the purchase and sale agreement and other legal documents
• Financing must be secured
• The buyer’s due diligence needs to be completed
These three tasks are often done in parallel and can take anywhere from a few weeks to two or three months to complete, depending on the complexity of the deal and the preparedness of the parties involved. It is important to keep momentum going and the process moving towards closing. One of the primary things a seller can do to ensure a relatively quick and smooth closing is to prepare for due diligence well in advance of the LOI being signed.
What Goes Into Due Diligence
Due diligence should be a process of confirmation, not discovery. If the seller has provided all material information to the buyer prior to the signing of the LOI (through a detailed confidential information memorandum), there shouldn’t be any surprises during the due diligence phase. Otherwise the buyer may try to renegotiate the deal or even back out. To prevent this, the seller should organize the due diligence materials very early in the sales process.
Due diligence generally includes the following items:
• Legal and regulatory compliance
• Environmental compliance
• Human Resources
• Contracts with customers, suppliers and service providers
• Systems and processes / IT
• Customer information
• Real estate
• Operations and assets
Even though the buyer will provide a due diligence list, most of these are common to any deal, so it is important for the seller to prepare early on. Don’t wait until after the LOI is signed to start gathering the information. Otherwise you will slow down the process unnecessarily while the buyer waits for you to gather and organize the information.
The list above is generic and will vary based on the industry. Due diligence information will be shared with the buyer and their advisors (attorney, CPA, lender), so it is important to use a secure, online data room. There are a number of good online data rooms available that allow the seller or their investment banker to manage the data while controlling and monitoring access.
Some sensitive items — such as customer lists — can be saved until later in the process, say after financing has been approved or even after the purchase and sale agreement has been signed. Ultimately, the deal isn’t done until the money is in the bank, so you can reduce exposure of certain sensitive information if necessary.
The Path to a Smooth Process
Here is some practical advice to running a smooth due diligence process:
• Start early
Ideally your investment banker will begin gathering and organizing the information while preparing the confidential information memorandum.
• Let someone who knows what they’re doing manage the process
This can be a complex process. Scrubbing the information and ensuring its accuracy is key.
• Use a secure, online data room
• Be complete
Time to open the kimono, so to speak.
• Keep the information updated
Things may change during the process (monthly financial statements for example), which is why online data rooms work well for completeness and version control.
• Maintain an updated master list
This list should include all items along with their status and the party responsible for them.
• Be patient
Don’t get frustrated, especially if the buyer has multiple advisors (attorney, CPA, HR, industry consultants) providing different lists that overlap.
• Keep access limited to essential personnel only
Confidentiality is important.
Due diligence is probably the most important part of the sale process that the seller has control over — aside from successfully running their business. If prepared for and managed properly, due diligence can help ensure a smooth closing.