In the current economic environment, due diligence processes tend to be more thorough and intrusive. Preparation for this is paramount to ensuring a process runs smoothly. It will also reduce the amount of time a board will need to expend and allow them to focus on the day-to-day running of the business. It is important that performance does not falter as ultimately, the success of the business is key to the entire due diligence process and maintaining the interest level of the investor/ buyers.
During the due diligence process, a purchaser will look to verify everything they have been told thus far. It will also give them an opportunity to look for ways to chip at the sales valuation previously agreed in heads of terms. While it is tempting to give away as much information as possible, the board should only provide information that is strictly necessary. When a trade investor/buyer requests commercially sensitive information, the board should not be afraid of asking them to justify their reasoning. Giving away too much detailed information can sometimes be used against a business and create a risk in the mind of an investor/ buyer which has no real justification.
Ensuring confidentiality of the due diligence process is critical for two reasons. The first is that there is a high level of commercially sensitive information discussed during this process. This could be used against a business if appropriate non-disclosure agreements are not in place. The second reason is that once the sale becomes public knowledge, stakeholder attitudes may change. For example, employees may be less motivated to work for the existing senior management team if they know they are leaving the business. In the event that a sale process fell through, the wider market would also wonder what caused this, which could raise questions about the business’ credentials.
The due diligence process can be extremely time consuming and costly if a suitable timeline is not agreed upon upfront. It is important to ensure this is both realistic and achievable. Investors/buyers will often try to enforce their own timeline, but you must be wary that if this is extensive, there is risk that due diligence fatigue could creep in. Due diligence fatigue is where you may you begin to lose control of things, agreeing to things you do not want and selling for a lower price than you deserve, just to get the deal over the line. Don’t let this happen and stay focused!
In summary, key pointers to help your board be prepared for due diligence are:
• Prepare for the due diligence process
• Be prepared for an intrusive purchaser
• Ensure the business keeps trading well
• Keep the process as confidential as possible
• Only provide necessary information
• Agree your due diligence timeline upfront
• Be aware of due diligence fatigue