Preparing for Due Diligence: How to Get Your Business in Shape for a Sale
Croke Fairchild Duarte & Beres
A full service law firm with offices in Chicago and Milwaukee.
Article written by?Croke Fairchild Duarte & Beres?Partner?Andrew Gilbert?and Associate?Taryn Strohmeyer
Business owners preparing to sell their company will encounter a variety of legal questions throughout the sales process. One of the most critical phases of preparation for a sale is due diligence, the process through which buyers evaluate a target company’s financial and legal health before finalizing the sale. Due diligence is an extensive process, involving review of every aspect of a target company, from operations to environmental concerns. As a result, the due diligence exercise will be one of the most intense review processes that a company experiences and will require significant time and effort from your company’s legal, financial, and business teams.
Legal counsel with experience in M&A will play a critical role in helping you prepare. Here’s how:
Understanding the big picture — and what buyers look for
An advisor will help you investigate your company’s overall financial and legal affairs to identify any risks, liabilities, or business concerns that could affect the value of the company or the success of the sale. The due diligence process typically includes a review of the company’s financial statements, tax returns, contracts, intellectual property, governance and employment records, policies, and other important documents, together with a series of deep-dive conversations with technical experts and the leadership teams.
You will be asked to provide a substantial amount of information and documentation about your company, respond to a series of written questions, and make yourself available for a series of diligence calls with the buyer’s experts in each relevant area.
Buyers will not only evaluate your company’s financial performance, but will also look for
Evaluating contracts to identify legal risks
Preparing for due diligence begins with a review of existing contracts and external relationships to ensure they are valid, complete, and enforceable, and to identify any outstanding liabilities or disputes that could spell trouble for the kinds of transactions you could be looking to consummate. If your lawyer uncovers a potential issue, he or she can craft a solution to resolve it and keep the process moving forward.
Addressing regulatory or compliance issues
Regulatory and compliance issues can pose significant roadblocks for a successful sale. Your advisor can help you review documents such as licenses, permits, and corporate governance records (including bylaws and board minutes) to ensure that they are up to date, and confirm with state regulators that the company is in good standing. Getting ahead of these issues and putting in place mitigation prior to a sale can ensure a smoother closing process.
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Preparing accurate and complete financial statements and records
Buyers will closely scrutinize the company’s financial statements and records during the due diligence process. Experienced M&A lawyers can work with your accountants to ensure that these documents are complete and in the form that the buyer will require. This may include reviewing accounting records, financial statements, and insurance claims histories to identify any potential issues, and ensuring that all financial information is accurate, up to date, and in good shape to share with a potential buyer. Any misrepresentations or omissions can raise red flags for potential buyers, impact the sale process, and result in post-sale indemnification obligations, so it’s important to get this right.
Protecting your IP and confidential information
Potential buyers will require access to sensitive information about your business, but you still have an interest in ensuring any information shared remains confidential, particularly in the event the proposed transaction with such buyer does not go through. Your lawyer can support you by drafting and negotiating confidentiality or non-disclosure agreements that are specifically crafted to protect your interests in a way that a form agreement cannot. A bespoke document will give you far more coverage and may even include non-solicits, non-interference, clean team reviews and other highly negotiated terms.
Ensuring timely, but cautious, responses
Once the actual due diligence review process begins, potential buyers will expect you to be prepared to provide extensive information and documentation related to your business in a short period of time. Taking steps ahead of time to collect the relevant information and documents can ensure a smooth process, which in turn can instill confidence in potential buyers. Your advisor can help you anticipate what you may be asked for and balance the need to provide the necessary information with protecting your interests. That may mean creating a plan to stagger the release of information or utilize a “clean team” or limited review team if you are considering providing information to a competitor.
Developing strategies to optimize value
An experienced advisor can help you protect your company’s value throughout the sale process. This may include negotiating with the buyer to address any concerns or issues (including negotiating post-closing indemnification obligations), developing a plan to remediate any identified issues prior to engaging in a sale process, or closing a transaction or developing a strategy to optimize the value of the company.
There is no one-size-fits-all shortcut for due diligence. Preparing to enter this phase of the sale process is complex and time-consuming, but with the right team, business owners can move forward with confidence and ensure that their business is in the best possible position for sale. Engaging an experienced M&A attorney early in the process can be a valuable investment in the future of your business.
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Croke Fairchild Duarte & Beres brings decades of experience leading complex, sophisticated, and cutting-edge M&A transactions that drive value for our clients. Our attorneys work with founders, family offices, family businesses, fund sponsors, and public companies across a range of industries on their most pivotal transactions, offering the full complement of services across tax, real estate, intellectual property, securities expertise, and all other services sellers need.
Planning for a sale? Let’s talk.