Sooner or later the buyer is going to want to go through everything with a fine-tooth comb. So get your paperwork in order well in advance. The biggest obstacle is likely to be your lease. No purchaser wants to be saddled with an unbridled upward rent revision, susceptibility to flooding, and so on. (If you haven't already discussed any such problem with the potential buyer before he asks, he is likely to assume you are desperate to sell.)
Buyers are similarly loath to take over firms in the middle of any potentially serious legal dispute. Sellers frequently find it wiser to set aside their legal rights and settle, thus losing something small to gain something big. Such a sacrifice may go against the grain, but you should always defer to your own greater interests.
Having everything in impeccable order demonstrates that yours is a well-run organization and thus worth serious money. Here's a list of paperwork any potential buyer is bound to check:
♦ Rights to ownership of the company, its premises, leases, and intellectual property
♦ Annual account of past years' trading including the very latest year. Larger firms should be audited. Smaller firms may get by with a financial synopsis.
♦ Securities and Exchange Commission requirements
♦ Changes in registered address, directors, and corporate administrator
♦ Filing information relating to shareholding structure
♦ Company minutes and register
♦ Register of share certificates and dividends issued
♦ Litigation; any ongoing legal disputes
♦ List of disputed invoices and credit notes
♦ Complete register of assets, all hardware items, date of purchase, serial numbers, location, original costs
♦ Software licenses
♦ Leases and titles to all the company's real estate (probably held by your attorney)
♦ Names, addresses, and full contact numbers (including e-mail IDs) for all the company's advisors, including bankers, attorneys, patent officers, accountants, and so on
♦ Other statutory obligations such as employer's liability insurance, data protection legislation paperwork, health and safety legislation, log books, and so on
Don't be put off by the length of this list. There's nothing here you shouldn't have already as the head of a well-managed firm.
This is lawyer speak for a detailed check on the facts. The buyer needs to inspect the books, make sure your records and contracts are up to date, and that your products actually do what you say. Typically, due diligence is conducted by the buyer's lawyers, accountants, Human Resources, and technology specialists. They may be part of the firm or hired from outside.
When you get the request of due diligence to be conducted, agree to the following:
♦ Dates and places
♦ Names and positions of those they wish to send
This enables you to get everything ready and protects you against unacceptable requests. For example, you might be working on classified military contracts. In this case, make it clear what they cannot see and explain your commitment to client confidentiality.
If the inspectors are doing their job correctly, they will be adequately briefed, polite, professional, but probing. It is their job to find issues. If they don't like what they find, you may take it that the deal is off. It is very important, therefore, to have staff and advisors present to assist the buyer's representatives. The people you select should have a helpful attitude and be able to answer all questions competently and promptly. If there is dithering, stand by to see the valuation plummet.
If the prospective buyer does not ask for due diligence, ask why. It could lead to later allegations of inadequate disclosure. If you ever find yourself in such a position, make sure that you have it in writing that the buyer was offered every opportunity for due diligence but turned it down.
Can You Use Due Diligence in Reverse?
If someone is promising you the earth, you want to be certain that they can deliver more than compost. You owe it to yourself to understand the credentials and financial worthiness of the firm taking you over. If the prospective buyer is publicly quoted on the stock exchange there will be a good deal of information already in the public domain. Otherwise, set your experts digging. I suggest you do the following:
1. Examine their audited accounts. They should supply these willingly. Otherwise, get the latest details for a modest fee from your state's business governing body. Ask your accountant to decipher them.
2. Speak to people who have recently been taken over by the buyer or who know and trade with it. Listen carefully to what they say. Investigate anything you don't like.
3. If money is involved, ask the potential buyer's bankers for a statement that there is sufficient money to close the deal. If the reply is "No," abort the deal.
Tip Unless your attorney and accountant have practical experience with takeover legalities, you would be well advised to retain specialists to consolidate and pre-/ sent your case. Make sure they aren't going on vacation and won't otherwise be tied up at the crucial time.
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