Comply with Due Diligence Requests

Most sellers underestimate how long the due diligence process actually takes

DUE DILIGENCE TAKES TIME!

• 30 to 60 days is very short
• 60 to 90 days is more likely
• 90 days or more is often the case

Under any circumstances, it will be important to comply fully and hopefully quickly with all reasonable requests of the potential buyer. Be prepared for (and don’t get frustrated by) boilerplate due diligence lists that may or may not be applicable to your company. If a request is irrelevant or inapplicable, simply explain why.

What Delays Due Diligence?

• The seller’s preparedness for buyer due diligence
• The availability of the seller’s team to support due diligence
• Whether or not the buyer is busy with other deals
• Whether or not outside reviewers are used
• How many questions arise, and how successfully those questions are answered
• The length of time it takes to write the due diligence report, present it and sell the deal to their board or acquisition committee
• International review, government approval

   DEMAND 1st DRAFT OF AGREEMENT IN 4 WEEKS

Due Diligence Seller Conduct

• Appoint one due diligence coordinator to:
• Work with outside due diligence teams
• Collect and review all requested materials
• Manage permissions and security protocols
• Monitor buyer questions, requests and meetings to ensure open items get closed
• Provide updates throughout the process and manage good news as well as bad
• Brief key employees with the “Big Picture”
• Why the company is involved in these discussions
• What is currently going on
• How the future of the firm (and their personal future) looks
• Everyone must realize that the process is a top priority
• They must be instructed to be completely honest
• They must know the due diligence coordinator and their role in the process

Creating a Definitive Agreement

• Establishes the transaction structure and terms
• Discloses all important legal/financial aspects
• Discloses information about the buyer
• Ability to abandon the transaction in the event of unforeseen defects
• Penny-for-penny compensation for losses arising from assuming unknown risks
• The closing to occur as soon as possible after the agreement is signed
• No post-closing event to require a refund of the purchase price, or worse

PQ provides template definitive agreements for your use within your sales process (must be reviewed and approved by your attorney).

Definitive Agreement Liabilities

• The major concerns of both parties will be…
• Representations and warranties
• Covenants of the buyer and seller
• Conditions to closing
• Indemnification
• Seller’s surviving liabilities sometimes take longer to negotiate than price and structure
• Liability will arise under the indemnification provision if the representations and warranties are not true as of the date of closing
• Content of seller’s representations and warranties (reps and warranties) the seller’s assertion that certain facts are true
• Share obligations, registration rights, and transfer restrictions
• Amounts and term of escrows, holdbacks, minimums and baskets
• Survival of reps and warranties

Definitive Agreement: Reps And Warranties

• 10-30% escrow is typical
• The seller should work to limit the survival of the representations and warranties after closing 18-month survival is typical
• On tax, fraud and securities matters, representations will last until the statute of limitations IP liability caps are higher
• The seller should not be liable for amounts in excess of the purchase price

Definitive Agreement: 10 Critical Terms

1. Allocating risk for seller contract assignments
2. Providing accurate financial reps and warranties
3. Managing balance sheet adjustments
4. Securing reasonable escrow and holdbacks
5. Ensuring liquidity when receiving publicly traded stock
6. Managing potential dissident shareholders
7. Avoiding delays due to disclosure schedules
8. Ensuring seller control to meet earn outs
9. Reducing variables between signing and closing
10. Motivating the buyer to close

Definitive Agreement: Top 6 Mistakes

1. Hiring an inexperienced lawyer
2. Drafting heavily in your own favor
3. Avoiding confrontation on key issues
4. Letting issues die with the lawyers
5. Not leveraging diligence for preparation of disclosure schedules
6. Leaving contingencies to closing

Closing:

PQ can provide a list of preferred third-party advisors for Step 11 including Tax Consultants, Lawyers, Accountants and more. 

Contact Us at any time for help or to provide feedback.

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