Preparing Properly for Due Diligence Can Move Your Deal Ahead
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Due diligence is a process of evaluating the financial and operational health of a company that is offered for sale or in a merger transaction. The process is structured to assure a potential buyer that the company is a sound investment and to reveal areas where improvements may need to be made, so it is usually done by the buyer’s representative. But due diligence can yield valuable information for buyers and sellers alike.
Preparing for a due diligence examination can be a time-consuming process, but a seller who shortchanges the process may end up squelching the deal. Once a shortcoming is discovered during due diligence, a seller is in the position of making repairs and keeping the potential buyer interested in the deal.
The buyer will want to examine contracts, employee records, customer agreements, compliance documentation, HR, and IP issues, among other documents, so all of these must be up to date and complete when they are provided to the due diligence team.
Besides financial performance, the due diligence process will likely shed light on strategic issues that could affect your company’s performance in the future. Is the company overly concentrated in a narrow market niche, leaving it vulnerable if a strong competitor swoops in? Are there supply chain issues that raise questions about the company’s ability to fulfill its orders in the future? Is the company having trouble, like many are, in attracting and keeping talented employees?
Think about what you would want to know if you were buying the company and gather data to answer those questions.
Use a Cloud-based Data Room
Using a cloud-based virtual data room is a best practice for facilitating the exchange of information. It is basically an online portal that allows all parties to track and review documents, as well as communicate with each other when there are questions.
A data room should be indexed, secure, and searchable to enable buyers to view the content they need to make an informed decision about the transaction. Savvy sellers will realize that a digital data room can give them the advantage of tracking potential buyers’ activity, giving them important insight into buyer behavior. Such insights can reveal a buyer’s concerns and enable the seller to adjust negotiating strategies if necessary. It can also inform the seller of key questions the buyer might raise when meeting face-to-face.
Handling Sensitive or Proprietary Information
Buyers will ask for information about your products, customers, sales pipeline, financial statements, technology, personnel, and everything else. As a seller, your job is to disclose the information necessary for a buyer to make a decision, but at the same time, protect your intellectual property.
Generally, sensitive or proprietary information like manufacturing processes and unpublished patent applications are not shared until a buyer is determined to be serious and a deal is imminent. Non-disclosure agreements are recommended to cover all information shared during a due diligence examination.
Sensitive information can also involve liabilities such as lawsuits or threats of litigation against the company. Pending litigation will likely reduce deal value and should be dealt with well before a buyer shows interest. To the extent possible, resolve legal issues before they detract from your company’s appeal during the due diligence process, and share all pertinent documents in your data room.
We’re here to help
For more information about the due diligence process and how you, as a seller, can prepare for it, contact your JLK Rosenberger team member or call 949-860-9902, or click here to contact us. We look forward to speaking with you soon.