M&A Due Diligence stages - selling your business step by step

Every good investment decision is based on sound knowledge about a given company and transaction process. This applies to both investors and owners who should learn about the opportunities and threats arising from sales with the help of Due Diligence. We advise on how this investigation is carried out and what to remember about.

We described Due Diligence in detail in our entry Due Diligence – what exactly does it include? In this article we will focus on the process itself and point to areas that can be particularly useful from the point of view of the business owner.

Due Diligence usually lasts from several weeks to several months and consists of four main stages. It depends on us whether we will use this time to the maximum.

This period involves verification of the sales decision by the seller – market analysis, spotting investor’s opportunities by conducting Vendor Due Diligence (VDD), and other activities that will help prepare for the transaction in a best possible way, leading to a proper valuation of the company before the start of the sales process.

It is important to have adequate psychological preparation, awareness of how the process will be carried out and – most importantly – appropriate counseling. Entrepreneurs, fortunately less and less often, decide to independently prepare the company for sale mainly for fear of violating the secrets of the enterprise and by overestimating their own capabilities and knowledge, while in such a case the help of an adviser is invaluable.

The adviser:

• help avoid common mistakes,
• dispel fears,
• carry out substantive VDD,
• address potential investors at an early stage of the transaction,
• prepare the investment teaser, which will present publicly available data on the company in a way attractive for investors.

There is no question of revealing any company secrets.

When the sale decision is finally made, potential buyers from the long list of investors prepared by the adviser begin to verify the available information about the company. This is based on a general check of the offer in terms of compliance with investors’ objectives and their investment strategies.

Based on the received teaser they will decide faster whether to continue the investigation. Proper preparation of the offer is also a great image-building message.

• After preliminary talks, selected investors sign an NDA agreement, which allows them to obtain more detailed information about the company.
• The buyer then presents non-binding offers that are designed to define the financial framework for the transaction and select investors seriously interested in buying.

This is where the moment comes to prepare company documentation that will go to the hands of investors. The standard is to use the Virtual Data Room system for this purpose, which ensures process efficiency, data security and significantly reduces costs.

The time has come for proper Due Diligence. At this point, the parties had already expressed their intention to enter into the agreement clearly. It is possible that they have signed a Letter of Intent or Termsheet, which:

• specifies in more detail the transaction schedule,
• sets goals for any future contract,
• serves to evaluate,
• determine how the investment will be carried out and more.

Termsheet is usually created at the initiative of the buyer, which is a clear expression of interest in buying. After its signing, the stage of negotiations and analysis of documents collected in the VDR system follows.

It involves detailed research on enterprise data with the participation of specialists, interspersed with Q&A sessions with investors (who can, for example, ask for insight into additional documentation) in order to develop general transactional conditions, identify risks and threats, assess the profitability of business, etc.

This process is continuous and reflective, and is designed to accurately determine the requirements and expectations of both parties.

The VDR system streamlines these activities in a measurable way. After achieving satisfactory results in the course of the analysis, the parties sign binding offers in which they determine the conditions for the further course of the deal. They may include preliminary costs and obligations of the parties.

An optional element is Confirmatory Due Diligence, which is the in-depth DD stage for one or two selected investors, which includes further Q&A sessions and negotiations on specific issues.

The final transaction report, which is a compilation of conclusions, is presented shortly after completion of the Due Diligence investigation and includes, among others:

• Description of significant events, operations and items of the financial statement
• Description of significant tax risks and irregularities
• Description of threats arising from contractual and corporate regulations
• Quantification of risks and their impact on the value of the entity covered by the investigation
• Valuation of the company

The final stage is not limited to signing of investment or SPA (Share Purchase Agreement). Both parties also most often specify conditions that will have to be met in order for the transaction to be finally closed in the time perspective.

Such a solution may, for example, impose the need to take over the company by the management board chosen in accordance with the agreement provisions, achieving specific sales results by the owner in a given period of time, implementation of given investment or restructuring strategies, KPIs on which the investor depends, etc. In such cases, only the meeting of given conditions might allow the seller to receive the full transactional amount (earn-out).

It is in the interest of the investor to help the seller meet these conditions, so in practice there will be no situation where the owner is left alone with the problem he faces, though. The partnership principle applies from the beginning of the transaction to its finalization.

Due Diligence is usually carried out in an IT system, such as virtual data room, which is a dedicated internet platform in which the seller collects the documentation subject to examination, and the buyer and his team analyze the documentation.

Data rooms usually have a number of safeguards that are designed to protect information, confidentiality (e.g. inability to save or edit analyzed documents on a disk, application of watermarks, redacting documents.).

These systems are provided by independent, specialized entities, which is of great importance because it gives the buyer separate, independent warranties as to what the seller has made available.

In turn, for the seller, the great value is that data room providers can take care of the process organization themselves – they scan documents, organize and send them to the data room, which guarantees:

• the correctness of the data entered,
• saves time,
• can reduce service costs by optimizing the size documents.

For more information on this topic, see the article VDR in Due Diligence process.