Two corporate professionals analysing data on paper

Due diligence: A seller’s perspective – Top five pitfalls to avoid

Two corporate professionals analysing data on paper

Due diligence is a critical element of any business sales process. A buyer will normally complete an initial commercial and financial appraisal before submitting a non-binding offer. However, the buyer’s detailed due diligence is generally only completed once the key commercial principles have been agreed between the parties. While agreeing heads of terms is a major milestone, the successful completion of the transaction will still hinge on the outcome of the due diligence exercise.

Stages in selling your business

Stages in selling your business

In order to simplify the process, it is becoming increasingly common for sellers to prepare their own vendor due diligence report before approaching prospective purchasers. By performing a comprehensive examination of the business before going to market, you may identify areas that can be addressed upfront and avoid unforeseen issues arising at a later stage. This approach should speed up the purchaser’s due diligence and narrow the risk of price renegotiations.

Before selecting a preferred buyer, it is important to understand their due diligence requirements, as they may differ in terms of breath and approach. A buyer will generally want to gain a detailed insight into the commercial, financial and legal aspects of the business. Depending on the nature of the business, the scope may also include a review of areas such as information technology, human resources, health and safety, regulatory, environmental and facilities. 

At a minimum the buyer will be looking to verify the information that it has relied on in agreeing the terms of the non-binding offer. The buyer may use the exercise to gain a deeper understanding of the risks and opportunities for the business to ensure that the investment continues to make sense. A buyer may also be looking at the cultural fit and aspects related to its pot-acquisitions integration plan.

As a seller, the due diligence exercise can be a very intrusive and disruptive process. It can be challenging for the management team to maintain focus on the day-to-day operations while at the same time responding to extensive queries from the buyer’s due diligence team. It is advisable to assemble a dedicated team to oversee the due diligence process. 

icon for preparation Preparation – The key to successfully completing a sale is maintaining momentum throughout the process. Preparation is therefore essential. If your business and financial affairs are not in order and up to date, it will lead to continuous queries and delays during the due diligence process. This will add to costs and could jeopardise the deal if the buyer loses confidence in the numbers. Indeed, the longer the process takes, the more likely that it will never make it to the finish line. 

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Clear Terms – Many deals fail where the parties become frustrated by endless negotiations. To avoid this type of deal fatigue, it is important to agree key aspects of the transaction in detailed heads of terms before commencing due diligence. Be clear regarding your expectations around EBITDA addbacks as well as the calculation of working capital and net debt. These can be significant amounts and can be contentious at a later stage. To streamline any negotiations, it is advisable to identify who are the key decision-makers in the buyer’s organisation – it is not always who you may be dealing with.

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Quality Information – It is essential to provide the buyer with reliable information in a form that can be easily understood. If the information is out of date, of poor quality or disorganised, the buyer will take a lower degree of assurance from the due diligence exercise. As this increases the financial risk profile of the transaction from the buyer’s perspective, a natural outcome is that the buyer may seek to renegotiate the terms of the deal. By helping the buyer understand the business you can mitigate this threat.

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Poor Communication – This is one of the most commonly overlooked issues that obstructs the due diligence process. Without clear channels of communication and a good rapport between the buyer and seller teams early in the process, the due diligence will quickly come to a standstill. You should identify a primary point of contact, whether internally or through your financial advisor, who will coordinate the due diligence with the purchaser’s side. You should keep abreast of all open workstreams and maintain open communication throughout.

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Avoid Surprises – The golden rule for the seller is to avoid surprises coming out of due diligence. If the buyer uncovers unforeseen red-flag issues, it will put you on the back foot and potentially derail the deal. It is critical that you conduct your own investigations at the outset and be candid with the information you share with the buyer. There is no point agreeing terms based on false assumptions, as the deal will only unravel when these issues come to light.

Crowe’s corporate finance team has a wealth of experience advising clients on M&A transactions. We provide sell-side, buy-side and financing due diligence, providing a focused and tailored approach to each specific transaction. We can help you analyse risks and opportunities in financials, operations, people and culture so you can make an informed decision regarding the proposed transaction.

If you are considering the sale or purchase of a business, we can help you maximise your investment. Talk to our corporate finance team today.

Naoise Cosgrove, Managing partner - Crowe Ireland
Naoise Cosgrove
Managing Partner
Corporate Finance
Partner, Corporate Recovery - Crowe Ireland
Aiden Murphy
Corporate Recovery