March 2012 | Jonathan Harris

A buyer will want to do due diligence on your business before signing contracts – to assess performance and check whether there are any “skeletons in the closet”. The bigger the sale (or the bigger the buyer) the more information the buyer will usually require.

The last thing you want when selling your business is for the agreed price to be bargained down because the buyer (and its team of accountants, lawyers, investors and advisors) is not satisfied with the outcome. We often see transactions delayed, and in some cases renegotiated, for this reason.

Being well prepared for due diligence (and setting a timetable or “exclusivity period” with the buyer) is a good way to push the transaction along and keep the momentum running. The longer the process, the more time the buyer has to get cold feet – especially if you can’t quickly and confidently hand over what they need.

To prepare for due diligence, we recommend an initial focus on 5 key issues:

1. Confidentiality:

Due diligence involves detailed investigation of your business, usually before sale contracts are signed. You should make sure the buyer signs a carefully worded Non-Disclosure Agreement (NDA) before they get access to your information. That said, a NDA will only protect you so far. Be savvy about what you disclose to a buyer. Don’t give a competitor information about your pricing, margin or key customers. If you must provide sales volumes about key clients, don’t list the name of the clients just call them “Client A”, “Client B”, “Client C” etc.

2. Key contracts:

Consider your key contracts:
(a) Are all the terms in writing, or do you rely on a handshake? A handshake might be fine for you but won’t be for a buyer.

(b) Can your key contracts be terminated by the other party? Will the buyer expect a minimum fixed term to be sure of a return on their investment?

(c) Are your key contracts exclusive? Could your key supplier or biggest customer pick up and move elsewhere?

3. Unresolved issues:

Are there any disputes with staff, clients, suppliers or competitors that should be resolved before you sell?

4. Intellectual Property:

Is all intellectual property used in the business owned by you? Have all contractors agreed in writing to transfer to you all the intellectual property they have created for you? Do you have licences for all software?

5. Staff:

Do the employment contracts of your key staff restrain them from taking your business’ goodwill with them if they leave the business or don’t sign on with the buyer? Will key staff stay on if requested by the buyer? Remember this will be a very unsettling time for staff, who will all assume their role may be in jeopardy and can act rashly.

Written by Jonathan Harris
Director
(02) 9231 2466

Due diligence will vary for each business.  If you would like our free Legal Due Diligence Checklist, please contact our commercial team on 02 9231 2466 or email Jonathan Harris at jharris@hflawyers.com.au

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