What happens in the Due Diligence (DD) phase of a business sale?

At a basic level, you could consider DD as similar in some ways to having a survey carried out when you buy or sell a house. However, due to the complexity involved in running a business, the level of information required to satisfy a buyer’s DD requirements is significantly higher.

To help smooth this process, we would advise you prepare well in advance, taking small steps to prepare responses to sections of a standard DD checklist

A buyer and their advisors will want to review all supporting documentation associated to every aspect of running your business. A full review of all contractual commitments will be carried out – from software licences to patents, car lease agreements to contracts of employment and much more. Your financial reporting will also be subject to in-depth review. Buyers will ask many questions: Which customers, products and services contribute most to profit? How are your accounts prepared? What adjustments are made at year end to create your audited accounts? How are your taxes are calculated? What VAT inspections have you had?

This entire exercise is typically conducted over a period of six-to-eight weeks, with the buyer’s ultimate motivation being to confirm whether their assessment of value in the Heads of Terms (HoTs) document is correct. It will also establish what (if any) risk they may need to mitigate as they turn their attention to drafting the Share Purchase Agreement (SPA), and in particular the Warranty schedule.

The value of preparation

To help smooth this process, we would advise you prepare well in advance, taking small steps to prepare responses to sections of a standard DD checklist with regular reviews on progress over a period of a couple of months. This should be completed well before you plan to make this information available to a buyer.

The responses can be gathered in a Virtual Data Room (VDR) and reviewed by your advisors to ensure all is in order. Should this exercise uncover any potential issues – for example, your software licenses have lapsed, or your statutory books are out of date – then this can be fixed in good time, and crucially before a buyer has access to the VDR.