M&A Series, Part 4: Due Diligence - Here Come the Questions

M&A Series, Part 4: Due Diligence - Here Come the Questions

     Once there’s a letter of intent in place for the sale of your company, both parties begin to focus on the collection, organization, and review of information about the company.  In fairness to the buyer, full information is key to their decision to buy a company, to decide what it’s worth, and to ensure they aren’t surprised after closing.

      In reality, the mountain of information that a seller must provide during the due diligence process is daunting.   Many of our seller clients have built their company from the ground up, have worked hard for decades, and their company has a history (both in documents and in growth).  They’ve also, in so many cases, relied on their trusted advisors and professionals to keep much of that information, such as attorneys, insurance brokers, accountants, and bankers.

 Mustering the entire team of advisors to respond to a buyer’s diligence requests takes patience and organization.  We educate our clients from day one on this part of the process, because it’s where we see sellers get overwhelmed. 

     First of all, it can take anywhere from 2 weeks to 2 months to complete, but can often be done simultaneously with negotiating the transaction documents and preparing to close the deal.

      The process kicks off with a multiple page request list from the buyer and buyer's advisors about all aspects of the business: contracts, corporate documents, intellectual property, insurance information, real estate, financials, and all other assets.  That list is usually in the form of a “due diligence checklist,” and when we represent buyers, that’s something we prepare for them.  It includes things that may seem ridiculous, like “a list of all chairs, desks, and other furniture and fixtures.” It also includes things that seem hard to obtain, like “a list of all intellectual property, including software, patents, copyrights, registered and unregistered trademarks, etc.”  Our job is to explain to you why these things are important and the best way to deliver that information.  This information ultimately becomes a part of your deal documents, so it’s important to get it right.

      The best analogy for this process is to imagine that you’re selling your house and all of your belongings with it. The potential owner wants all of the information it can get about what it’s buying (and so that it can pay the right amount, down to the nickel).  This inspection process includes opening drawers, poking around closets, and peering into your basement or crawlspace. The new owner wants to know how many socks you’ve lost in the dryer over the years, whether you’ve ever seen a mouse in the basement, and what kind of care and how often you’ve cleaned out your fridge.

     These questions, in both volume and content, can feel invasive and like a potential buyer is prying. That’s why we always encourage sellers not to take the diligence process too personally, and to begin preparing for it far in advance of a sale of the company. This could mean creating electronic copies of your contracts, working with your accountant to get your financial house in order (perhaps with some auditing of financials), or transferring personal assets out of the company.  That said, a well-informed business owner is one who recognizes the importance of the information exchange, and we try hard to make the process less overwhelming and more organized.

      At Stock Legal, our assistance in this process varies by client and transaction.  We are on hand to assist as much, or as little, as our sellers need in order to get the diligence complete.  We have gone to a client’s office to dig through their boxes of files, and we’ve also just done a quick review of a client’s diligence materials.  As the seller’s attorney, we act as a reasonable middle-person between our client and the buyer’s advisors, and will often will pare down initial and follow-up requests that are unreasonable or unnecessary. As the buyer’s attorney, we often run that “due diligence checklist” to make sure that the seller provides all of the information requested with the right level of detail.

If you’re considering a transaction and want more information or legal counsel, feel free to reach out to us! We’re prepared to meet your timeline and assist you in the sale of your company.

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