You put your company up for sale, potential buyers are lining up. What then follows is the inevitable: The due diligence process, in which the buyer kicks your tires before going ahead with the purchase. In the many, many M&A deals of my career, this part of the auction/sale process tends to be one of the more anxiety producing. It is also the one that requires a lot of company time as opposed to the lawyers doing their part.
The following few tips are meant to reduce the stress-factor—as always, being prepared is half the battle:
Embrace the inevitability and be open: Understandably, buyers want to obtain as much information as possible about your business to confirm their understanding of what they are buying. Being as open as possible not only speeds things up but also instills confidence. I can promise you that a buyer will cut you more slack in the negotiation of reps and warranties and indemnities after being able to conduct thorough due diligence. Do not try to hide unpleasant/skeletons-in-closet-type matters. Trust me: they will come out eventually either before or after the purchase with usually very unfavorable consequences.
Be proactive: Once you make the decision to sell, start thinking about due diligence. Buyers will want to examine your financials, tax returns, legal documents etc. Legal documents include formation documents and minute books, key business contracts, employee files, and documents related to your intellectual property. It’s imperative to have all of your paperwork in order and readily accessible. Unsorted boxes in a corner – which I sadly encountered my fair share of - will raise suspicion. Documents should be complete and grouped in logical categories. You may want to invest time and resources to set up a virtual data room.
Set parameters: Due diligence is distracting. Engage in the process only with buyers who are serious and after a letter of intent is signed. Also – agree on a drop-dead date to avoid wasting time and resources. Make sure to appoint a point person within the company for inquiries. Think carefully about whom at your company you would like to be involved in, considering that it’s the early stages of a potential sale.
Ensure confidentiality: You will provide a great deal of information about your business, most of which will presumably be non-public. It is imperative that you ask the buyer to execute a non-disclosure agreement. The agreement should state that the use of any proprietary information is limited to the negotiations and getting the deal closed, and preferably, it should have no sun-set.