In our last article in this series (“Proper preparation prevents poor performance”), we gave 3 initial tips for potential sellers to consider before embarking on the process of attempting to sell their business. Our next 3 tips relate to due diligence and indicative offers.
Tip 4 - Get your backyard in order
- Consider and collate the documents/information that a potential buyer will want to see when conducting due diligence on your business. It is important to get everything in order before entering into discussions with a potential buyer to determine whether there are any gaps or errors in the information (or documentation which can be corrected before due diligence commences).
- If you are able to give a potential buyer correct and up-to-date due diligence documents, this is likely to help give the potential buyer comfort, enhance value and lessen the severity of warranties and indemnities that may need to be agreed with the ultimate buyer. Missing documents (or gaps in information) can have the reverse effect.
- The categories of key documents/information that a potential buyer is likely to want to review during due diligence is contained in the mergers and acquisition planning checklist referred to below.
Tip 5 - Use a non-binding indicative offer/heads of agreement
- An indicative offer, heads of agreement or letter of intent is a good way of setting expectations with parties in relation to the potential terms of the deal and the proposed timetable.
- These documents should be non-binding, except for confidentiality (and possibly exclusivity and break fees, if applicable).
Tip 6 - Allow for a comprehensive due diligence process
It is important to have a well organised and comprehensive data room. A data room is important for a few reasons:
- The content of the data room forms the basis on which a potential buyer will determine its offer price for your business - so in simple terms, a disorganised/deficient data room can often result in a lower offer price (or the buyer requesting onerous terms and conditions in the sale and purchase agreement to protect its position).
- An effective data room can also give powerful tools to the seller (e.g. document security mechanisms, the ability to monitor who is reviewing what documents and for how long, and an effective process for submitting, answering and recording requests for further information (a.k.a RFIs)).
- If important information is missing from the data room (or there is any false or misleading information) and the deal goes ahead, then this may result in the buyer making a claim against the seller in the future for breach of warranty or misleading and deceptive conduct - so it’s important to have an accurate record of exactly what was disclosed to the buyer to assist with any future claims.
- Seller’s should consider using an online data room (such as the system offered by Ansarada) with document security controls (e.g. restrictions on copying, printing or sharing documents) rather than an online file sharing service like Dropbox.
To assist sellers in planning for a potential sale of their business, we have prepared a mergers and acquisition planning checklist. The link to the download page is below:
Look out for the next article in this series, which will provide some tips and traps relating to M&A transaction documents.
For more information, please contact:
Craig Sanford, Director, Sierra Legal on M: +61 (0)416 052 115 or E: firstname.lastname@example.org
Mike Jeffery, Director, Sierra Legal on M: +61 (0)402 745 054 or E: email@example.com