"Whether you are buying or selling a business, a robust due diligence process is vital."

Jim Shaw
Founder & CEO, Shaw & Co
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So why are buyers so insistent on due diligence? Remember MySpace? Once the largest social networking site in the world it was sold to Rupert Murdoch’s News Corporation in 2005 for $580 million. Within two years its value had soared to $12 billion yet by 2011 it was a dying brand that was eventually sold rather quietly for ‘just’ $35m.

What went wrong? Not only had due diligence processes failed to notice a complete lack of a proper research and development strategy, it had also failed to pick up on rivals coming down the track, particularly one called Facebook.

Whether you are buying or selling a business, a robust due diligence process is vital in ensuring that there are no hidden surprises and all involved know exactly what they are buying or selling right from the outset. It lays a foundation of trust and affords the confidence required by everyone involved in what is sure to be a complex and sometimes stressful transaction.

For those selling a business, it is vital to ensure that you have employed a corporate financial advisor who has not only made the business as attractive as possible to a range of potential buyers, but who has also prepared you and your business for a sale process and subsequent due diligence. In our experience, business owners are almost always shocked at the level of detail a buyer will go into when conducting the due diligence process - no stone will be left unturned.

Although due diligence normally comes into play later on in the sale process - once you have a preferred bidder, have agreed Heads of Terms and have granted them a period of exclusivity within which to get the sale done – it is important that you have been planning ahead, sometimes years in advance. For example, are there any issues within your business – be it an employee dispute or an IP issue - that you will soon need to mitigate lest they scare off potential buyers? If you don’t plan then the consequences could be disastrous.

For those buying a business then the core advice is the same. Employ a corporate financial advisor who can support you and ask the right questions.

In terms of the specifics of due diligence then these are the common areas:

1 Financial/Tax

This is where what seems like herds of accountants are brought in to go through management accounts, tax returns, sales records, employee pay packages etc. The key thing here is to be prepared – all this information will need to be available in a secure virtual data room so that the accountants can pore over the details long into the night.

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2 Technical

This is of particular relevance in the current TMT focused market if you are buying or selling a software business where access to technical information such as software code for testing is required. This is usually conducted via a specialist secure third party.

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3 Legal

Here come the lawyers. Customer contracts, insurance details, Intellectual Property registrations, details of any litigations or disputes, property assets, pension schemes etc. They all need to be up to date and you need them ready.

4 Commercial (Private Equity)

A trade buyer will know the sector of the business they are buying as obviously they are already in it. If a private equity investor is involved, however, then commercial due diligence will also be likely as the investors may not be experts in the sector and will therefore employ dedicated consultants to analyse the opportunity more thoroughly.

One other aspect for sellers to consider is vendor due diligence which involves the use of accountants and consultants to provide initial financial/tax due diligence to help attract a wider array of potential buyers and more favourable and accurate bids. This can be a very sensible idea as it gives the seller a greater deal of control while helping to shorten the process. It also really does help the buyer prepare the bid, quickly highlights any issues, and does provide an immediate level of trust. Of course, the downside is that it can be very expensive for many SMEs.

In general, due diligence should be seen as something that develops trust on both sides that will help get the deal completed as quickly and smoothly as possible. As News Corporation found out, nasty surprises are just that. Nasty.

We work with owner managers of UK SMEs that are looking to fully or partially exit the business they’ve grown. Our value lies in helping clients assess their readiness to exit, finding the right buyers willing to pay the right price and managing the sale process whilst minimising associated risks. For a confidential, independent, no obligation discussion on how to sell a business, click the 'Let's chat' button.