Tips and traps for selling your business (Part 2 of 4) – Get your backyard in order

In our last blog 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 selling their business.  Our next 3 tips concern 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.

Tip 5 - Use a non-binding indicative offer/heads of agreement

An indicative offer/heads of agreement/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 terms (and possibly for terms dealing with 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).
• 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 suing 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.

Sellers should consider using a virtual data room with document security controls (e.g. restrictions on copying, printing or sharing documents) rather than an online file sharing service.

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For more information, please contact any member of the Sierra Legal team, whose contact details can be found here - LINK.