Due diligence is an essential phase in the sale of a company or the sale of business shares. After the field of interested buyers has compacted and few potential buyers have signaled their serious buying interest, the interested parties are given a temporary opportunity to deal with very detailed information about the property. The prerequisite for this is the completion of a letter of intent in the form of a letter of intent (LOI) and, of course, a declaration of confidentiality, which is usually already available by this time.
The due diligence phase gives the potential buyer the opportunity to carry out a structured risk assessment. Documents and information on commercial, legal, organizational and technical aspects must be provided by the seller.
In practice, it is advisable not to compile information “indiscriminately”, but rather to pick up the specific requirements for this phase from the buyer side before setting up a so-called data room (today usually on an electronic basis), or better via his M&A consultant. In addition to the mandatory parts, such as insight into financial and tax law aspects, experience has shown that different perspectives are desired and decisive from the investor side.
While traditional financial investors generally focus on numbers and above all on the development of sales, costs and earnings, strategic investors take a different perspective on the project. Here, the purchase of key technologies or a staff or customer base can be the primary driver. In the sale of hardware and software companies, for example, a code review is usually carried out as part of technical due diligence. Interested buyers and investors also want to see what the level of documentation of the development status is, since the asset usually lies – alongside existing customers and employees – primarily in the technology itself. This is why it is so important to coordinate with the potential buyer in advance which information is necessary for a thorough risk assessment.
If several interested parties check the project at the same time, separate electronic data rooms should be provided for reasons of confidentiality. In principle, the seller has the right to know who gets access to the sometimes very sensitive data from the buyer side. In addition to acting persons from the buyer, external buyers’ advisors also have access. Here, too, the M&A consultant can provide useful support in order to obtain a complete list of contacts with functions in advance and to professionally moderate the process of due diligence across the entire route among all those involved. As a rule, many detailed questions are raised during the examination, where it makes sense that these are recorded precisely and answered promptly.
It is not uncommon in this phase for there to be an intensive dialogue between the seller and his advisors, including tax advisors, lawyers and accountants. At this point it should be mentioned that the people mentioned are all just Are consultants to the seller and also have to be well controlled, since they also only look at the project from their perspective.
Since due diligence (DD) can take a period of a few days to several weeks or even months, the operative business of the selling entrepreneur naturally continues during this time. Therefore, during this phase, the seller is usually asked to actively inform potential buyers about changes that go beyond normal business operations. There is usually an obligation to provide information about changes in the workforce – this applies to both arrivals and departures – as well as changes on the customer side, which is of particular interest to layoffs of key customers. In addition, information should also be provided if relationships with business partners change or tax inspections and findings result in changes in the commercial documents.
All the results and findings of this important phase will later flow into the final assessment of the purchase price, which hopefully will be confirmed from the seller’s perspective in the amount discussed in advance and the payment modalities. On the other hand, they have an impact on the buyer’s warranty and guarantee claims that will be found later in the purchase contract.
The more detailed the examination is made by the interested party, the more special questions can arise. In addition, situations and facts can arise within the scope of the DD that a seller does not even know (should be the exception) or is no longer consciously on the screen.
Here, too, it helps to discuss these potential critical issues with an M&A consultant in order to consider how they should be communicated to an acquirer or whether they need to be communicated at all. A critical issue that must be communicated in any case could be, for example, that there are customers with whom the provider is currently in litigation or employees who have signaled that they want to leave the company.
Because due diligence is carried out in every transaction, the seller can prepare for it in good time. He is well advised if he checks his documents and data for completeness in parallel with the market approach of potential buyers, prepares them and, in this context, also digitizes them if there is still something in paper files. This ensures that the duration of the transaction process is not lengthened artificially. Missing annual financial statements, balance sheets or contracts could easily extend the process by 2-3 months.
In summary, it can be said that due diligence should confirm a company’s strengths and show possible weaknesses. If this decisive phase has been successfully mastered with all those involved, then the path to a successful transaction is usually paved.