Selling a business isn’t just about a strong balance sheet or growth story – it’s also about trust. Nothing builds or erodes buyer confidence faster than uncovering major issues during the due diligence phase. Identifying any roadblocks or ‘weaknesses’ in the business at the onset of a transaction can therefore help provide visibility around issues that a prospective buyer may raise during their due diligence process.
Set out below are two common options that should be considered by sellers before they seek to engage a prospective buyer, whether through a single-buyer or auction sale process.
Pre-transaction health check
A pre-transaction health check is an early-stage due diligence exercise that a seller and its advisors conduct on the target business to identify any value or deal-impacting issues which can then either be remedied ahead of the buyer’s due diligence process or considered when negotiations around valuation with a prospective buyer are conducted.
A pre-transaction health check can either be targeted to certain areas within the business (where a seller has specific concerns) or comprehensive in nature. In a comprehensive legal health check, aspects of the business such as corporate structure, corporate and licensing documentation, regulatory, material commercial agreements, real estate, banking and finance, employment, intellectual property, data protection and IT are assessed. The seller, with the help of their advisors, will identify problem areas with recommendations for remediation where possible. Examples include a pre-transaction restructuring to facilitate a simpler acquisition structure, renewing any expired contracts or licenses or putting in place new or more robust commercial agreements.
A balance should be struck between cost and time expended by a seller on any remedial actions before a prospective buyer is secured but early engagement with sellers is needed for a meaningful ‘kick of the tyres’.
Vendor due diligence
Vendor due diligence is increasingly common in auction sale processes where multiple buyers are interested in acquiring a target business. The process typically involves a seller, with the support of their advisors, conducting a comprehensive due diligence exercise on the target business prior to the commencement of a transaction and presenting those findings to prospective buyers in the form of a vendor due diligence report. The key advantages of conducting a vendor diligence exercise are:
- A seller can entertain multiple bidders efficiently without having to conduct individual due diligence exercises with each buyer. This can reduce deal timelines and limit the resources the seller needs to expend to complete the various due diligence exercises.
- Buyers are encouraged to participate in the sale process as the burden of incurring buyer-led due diligence costs are reduced. This can help create “competitive tension” between the buyers to close the sale.
- Buyers can obtain a sound understanding of the business and any material issues upfront. This will limit their need to run a full due diligence exercise and any confirmatory due diligence exercises can be focused on specific targeted areas. In turn, a seller’s management time will be freed up to run their business.
- Any material issues identified during the vendor due diligence process can be remedied if possible.
