Vendor Due Diligence – Putting your Business in Order
Due diligence, the process by which a potential buyer examines the legal, financial and commercial aspects of a target business, can be traumatic for both buyers and sellers alike. Whilst there might be the odd buyer out there who prefers ‘light touch’ due diligence, such are few and far between. Most buyers will believe that due diligence is an essential element of any business acquisition.
The due diligence process, which typically commences after entry into heads of terms, will, more often than not, involve a thorough investigation of every aspect of a target company and its business. Most buyers will refuse to proceed with a share or asset purchase until they have had sight of all the information and documentation they require. As such, the due diligence process often takes a great deal of time, costs both parties a substantial amount in fees and can, unfortunately, create discord amongst the parties.
However, whilst due diligence is unavoidable, the stress and tension often experienced by those undertaking it doesn’t need to be. By carrying out a vendor due diligence exercise, that is due diligence conducted by a seller in respect of its own business before it’s marketed for sale, a seller can get ahead of the game and ensure it is prepared for a buyer’s later enquiries from the outset.
Early seller-driven due diligence forces a seller to get its business organised. If documents are missing, they can be located or replaced. If information is required, appropriate requests can be issued. Matters of this nature would serve to delay a buyer-driven due diligence process and could create friction between the parties. Dealing with them in advance however, ensures that a seller has all the information and documentation it is likely to be asked for is at its fingertips. Not only does this result in time and cost savings for both parties, it also sends out the message that the seller has nothing to hide and helps to create a relationship of trust between the parties.
Vendor due diligence is also a useful way of flushing out problems and complications within a target business. It is to be expected that, over time, a business will get into bad habits and there will a be a few issues in need of ironing out or tightening up. By highlighting them at an early stage, a seller has the opportunity to rectify them or, where that’s not possible, to market them in the best possible light. Conversely, if they’re not identified until late into the sale process, their discovery can lead to mistrust, renegotiation and maybe even the end of the deal.
A vendor due diligence process can also help a seller to identify precisely what it is about its business a buyer will be interested in. One business might, for example, be attractive to a buyer because of the quality of its management team, whilst another might be appealing because of the nature and extent of the contracts it holds. Early due diligence should give a seller’s leadership team ideas about how best to market its business as well as highlighting additions and alterations that could be undertaken in order to make it even more marketable.
For information or advice in connection with the due diligence process and the benefits of conducting a vendor due diligence exercise, please contact Amy White, a solicitor in our Corporate/Commercial team at our Uckfield office on 01825 744489 or via email firstname.lastname@example.org.