Preparing for Due Diligence

The decision to sell a business is not an easy one. However, the process required to ensure an optimal outcome is often lengthy, always detailed and invariably demanding on a company and its people. Potential acquirers need to be managed through a due diligence process which, depending on the entity and its level of preparedness, can place significant demands on the organisation.

A due diligence process is an opportunity for a party contemplating an acquisition to confidentially look under the hood, kick the tyres and decide whether they want to proceed with a negotiation. If you are selling you want to ensure a smooth process, one which will lead to a negotiation and to do that requires preparation.

A due diligence will cover a wide range of issues, information and examination. Each business will have its own particular dimensions that will tailor the preparation process, but in general you can expect to have to address the following elements:

Executive Management:

• CV’s
  ◦ Organisation structure
  ◦ Meeting with Directors
  ◦ References checked
  ◦ Assessment of gaps/potential weaknesses
  ◦ Requirements for NEDs
  ◦ Remuneration

Products / Services:

• Overview of main product areas
  ◦ Margins on product lines
• Assessment of product quality
  ◦ R & D expenditure
  ◦ External review of production capabilities or facilities
  ◦ External valuation of production facilities and site

Customers & Markets:

• Customer references to evaluate product/service quality, delivery performance, capabilities
  ◦ Level of sales concentrationi.e. Who are major customers?
  ◦ Market sizing and competition
  ◦ Sales forecast and distribution partners

Suppliers:

• Key suppliers?
  ◦ Alternative suppliers?
  ◦ Documented agreements?

Financial:

• Last 3 years audited accounts.
  ◦ Last 12 months monthly management accounts.
  ◦ Auditor’s report.

Forecasts:

• 5 year forecasts for P&L, balance sheet and cash flow
• Financial model to test sensitivities to key financial drivers
• Expected capital expenditures

Miscellanous:

• Franchise agreements
• Intellectual property including patents, trademarks
  ◦ Pending or current litigation
• Compliance with statutory requirements regarding superannuation and tax

Once you have provided and discussed this information then the process should move to negotiation ... and a whole new set of considerations and conditions to be discussed and agreed. We’ll look at that in another Insight