Here’s an example of one of the many Due Diligence (DD) plans and data requests that we’ve received over the years, to get an idea of what a buyer may be looking for during the DD process.
There are two kinds of DD, that generally happen at different times in the sale/acquisition process, and as the vendor, you have considerable control over how this happens:
- Up-Front DD – this commonly happens when a buyer has been given little information early in the process and feels that they need to get a much better understanding of the business before they are prepared to look at making a concrete offer, let alone moving to contracts.
- Confirmation DD – happens after a deal has been agreed and is largely a process of confirmation; the buyer is confirming for themselves that what you’ve told them is correct. This is what happens when buyers have been given comprehensive information up front, and can do DD after the deal is agreed, just prior to completion.
Confirmation DD is usually better from a vendor’s perspective because it allows you to negotiate with more parties in parallel before you need to undertake what is often a very invasive and (internally, at least) public process. Confirmation DD is also generally more structured and efficient, because the buyer has a lot of information and understanding with which to prepare.
Up-Front DD can be quite destructive, in that it often brings a number of your staff in direct contact with one or more prospective buyers and can create uncertainty. It can also sow the seeds of discontent, when staff ‘fall in love with’ a buyer who does not ultimately complete the transaction.
Unscrupulous buyers can use the Up-Front DD process to their advantage by drawing it out until other buyers may fall away and/or the performance of the target business is impacted. They will then seek to reflect a lower valuation in further negotiations.
Competitors can also use the Up-Front DD process to extract sensitive information when they do not in fact intend to complete an acquisition. There are lots of pitfalls here, and we’d be happy to share some war stories if you get in touch directly.
Vendors can control the DD process type by providing a comprehensive Information Memorandum (IM) early in the process. This document needs to avoid giving too much away, but should provide the buyer with enough information, conveyed in enough of a spirit of openness, that they feel comfortable in putting forward an Indicative Offer (IO) including at least an indicative valuation, before going into the DD process.
This method of selling a business has a lot of advantages for a vendor, but it also suits most honest buyers, in that they can save a lot of DD time and effort if their offer is not ultimately going to succeed. It’s better to get to a quick ‘no’ than a slow ‘no,’ unless the buyer is looking for information they shouldn’t have, or trying to guide the process to the vendors’ detriment.
There’s lots to talk about here – why don’t you give us a call and we can talk you through the process we’ve found most successful in the past?