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Purchasing a business can be a lengthy process. As part of that process, the buyer will want to understand the specifics of what they are buying. They will want to review information and documentation about the business to verify the assets included in the sale, and if it is worth the seller’s asking price. This investigative process is called ‘due diligence’. This investigation will consist of reviewing the

  • financial records;
  • business records; and
  • commercial aspects of the business.

As the seller and the owner of the business, you may be wondering where to start. This article will provide you with some guidance on how to prepare for due diligence, and what the process looks like once it is underway.

Preparing for Due Diligence

The nature and value of the sale and the timeline for the purchase will impact on the amount of due diligence a buyer would like to do on your business. 

For example, your business is valuable and you are offering it for sale for a high purchase price. In that case, you should expect that the buyer will want to review all material records for your business. This helps them assess whether they are getting a quality business. Generally, a buyer will at least want to look at the:

  1. financial statements;
  2. sales reports;
  3. premises itself;
  4. leases;
  5. contracts with key suppliers and customers;
  6. plant and equipment;
  7. equipment hire contracts;
  8. employment contracts and contractor’s agreements; and
  9. details of intellectual property ownership (e.g. trademark documentation).

Often the material a buyer will want to investigate is sensitive commercial information. Therefore, you should ask the buyer to enter into a non-disclosure agreement (NDA) with you before handing over your business information. The confidentiality protections included in an NDA will restrict what the buyer can do with your information.

An NDA should also include clauses that:

  • set out what the buyer is required to do if the sale does not proceed (i.e. return or destroy the information); and 
  • what happens if they breach their confidentiality obligations.

If you are at the early stage of the sale, it is worth getting together all of the material information about the business early on. This preparation will ensure you are ready to hand over the information to the buyer when the time comes.

The Due Diligence Process

Once you have both signed the NDA, you can provide copies of your business information to the buyer for their review. If you have an agent, lawyer or accountant assisting you with the sale, they can also provide information to the buyer on your behalf. You and the buyer may even prefer to use an online cloud-based document sharing system, called a ‘data room’. This allows you to store your documents and provide access to the buyer and the buyer’s lawyer and accountant.

The buyer will most likely provide you with a list of the documents that they would like to review. That’s when you will start uploading the material to the data room. They may also request access to your physical premises (if you have one) so that they can:

  • inspect the office;
  • consider the location; and
  • take a look at pieces of equipment or machinery.

Once the buyer has started looking at your business information, they may also send you lists of questions about that information.

The buyer may choose to do this where they have follow-up questions about some issues or request related documents to the ones you have already provided. This process is called a ‘request for information’ or ‘RFI’, and the buyer will usually expect you to submit a list of responses to their RFIs. The RFI process is generally done via a spreadsheet or online system. This allows you and the buyer to easily see the questions and answers you have both submitted.

The due diligence process can take anywhere from a couple of weeks to a few months. The timeline depends on: 

  • the complexity of your business;
  • the amount of information the buyer requests to review; and 
  • your timing for the sale generally.

After Due Diligence is Complete

The due diligence process will usually take place before a formal sale of business or share sale agreement is prepared. Sometimes, however, this process can happen after the sale agreement is signed. Generally, once you and the buyer have agreed on the commercial terms of the sale and the buyer has notified you that they are satisfied with their due diligence, you will be responsible for having the sale agreement prepared.

You and the buyer will then negotiate the legal terms of the sale agreement. Once you have agreed on the final sale agreement, you will both proceed with signing the contract. There will then be a period between signing and the day that the buyer formally takes over ownership of your business. This period gives you and the buyer enough time to prepare for the handover.

Key Takeaways

The due diligence process is one of the fundamental parts of a business sale, and you should not underestimate it. As a seller, it is essential to prepare for this process to put your business in the best position possible to achieve the highest asking price you can. If a buyer can see that your internal record keeping is precise and up-to-date, they will be able to see that your business is valuable and worth pursuing. If you have any questions about the due diligence process as part of a business sale, contact LegalVision’s sale of business lawyers on 0800 005 570 or fill out the form on this page.

What is due diligence?

Purchasing a business can be a lengthy process, and as part of that process, the buyer will want to understand the specifics of what they are buying. This will involve an investigation process called due diligence.

How can I prepare for due diligence?

As a business owner, you should be prepared for due diligence by preparing all the documents the potential buyer requests within a timely manner.

What happens after the due diligence process?

If the potential buyer is satisfied with what they find during the due diligence process, you can then negotiate the legal terms of the sale agreement with them. Once you have agreed on the final sale agreement, you will both proceed with signing the contract.

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