Let the buyer beware: prepping for sale and how to get your business ‘due diligence’ ready

Due diligence is the process by which the buyer of a business investigates the target business, and is a key stage of any sale transaction. It usually commences once principal terms have been agreed, and runs in parallel with the negotiation of the key contractual documents such as the sale and purchase agreement.  

To kick off the due diligence, the buyer will produce a due diligence questionnaire, which will require the seller to provide written explanations and copies of relevant documents in relation to key elements of the business. The provision of these documents is typically via upload to a secure virtual data room (VDR), and any seller will want to ensure that there are clear confidentiality and non-disclosure requirements in place beforehand.

Even if you have not yet found a buyer, if you’re thinking of selling, it’s a good idea to get organised internally by getting together the information you’re likely to be asked for. Due diligence can be a detailed and lengthy process and undertaking preparation in advance could save time and money later down the line. 

A buyer will generally seek information on the following topics.

Corporate background

The buyer will seek details of how the business is structured and copies of key constitutional documentation (such as company registers, shareholders’ agreements and articles of association for companies, and partnership agreements for partnerships and LLPs). 

Commercial contracts 

Copies of contracts for goods or services with customers or suppliers, and any standard terms and conditions of the business, will be requested. The buyer will also want to know whether any key customer or supplier consents are required before the sale can go ahead.  

Accounts, finance and banking

Copies of recent statutory and management accounts, and the terms of any lending, including details of any security, will need to be provided. 

Assets

The buyer will likely want to see a register of the assets owned by the business, including details of their age, value and whether they are owned outright or under hire purchase or lease agreements. Copies of any such agreements will also require review. 

Intellectual property rights

The buyer will want details of both registered and unregistered intellectual property, and the basis on which it is owned or used by the target business. 

IT systems and services

The buyer will want to understand what IT systems and services are used by the target business, including details of any software owned or licenced.  

Insurance

Copies of insurance policies, and confirmation that suitable insurances are in place, will be required. 

Regulatory and compliance matters

This includes details of data protection, health and safety and anti-bribery policies and procedures, as well as details of any sector specific regulatory registrations or consents that are needed to run the target business. 

Property

Details of any properties owned, leased or used by the business, including details of any environmental consents that may be required. 

Employees and pensions

The buyer will want to see an anonymised staff schedule, detailing number of employees and their current roles, as well as copies of any standard terms and conditions and employment policies and procedures (such as the staff handbook). They will also want details of any pension arrangements in place, including confirmation of how many staff are enrolled on the pension scheme and how many have opted out. 

In order to prepare for sale, it’s a good idea for business owners and/or managers to start creating internal directories of all of this information, ensuring it is in a soft copy format and easy to access, in anticipation of a due diligence questionnaire and the uploading of documents to a VDR. Keeping staff schedules and asset registers up to date will also help reduce workload when it comes to completing a due diligence exercise. Similarly, keeping a note of any customer or supplier contracts that require a consent to a change of ownership would be helpful. 

A VDR would normally have a separate folder for each of these categories, and organising your information in a similar way internally can increase speed and effectiveness when it comes to finding the information required and uploading it to a VDR as part of the sale process. 

Additionally, reviewing and organising key documents in advance can help to identify any potential issues early on, such as any consents which may be required for the proposed change of ownership. If you are missing any important information, you will also have more time to request additional copies. 

If you would like to discuss the potential sale of your business, or how you can prepare the documents required for a due diligence exchange, please do not hesitate to get in touch. 

Hayleigh Southgate is an associate solicitor in the corporate and commercial team with a focus on company law and business acquisitions and disposals.