Executives who have not led a sale or merger of a company before are often caught off-guard by how much work goes into due diligence. For many who are successful, the building of the business crescendos and culminates in a sale. The term sheet is signed, you smell the money, and perhaps even book your post-closing vacation, but you may not realize that you’ve just signed up to run a muddy obstacle course race while also running your business. Your next several weeks, maybe months, will be consumed by responding to page after page of information and document requests from your potential acquirer. You will be questioned about all aspects of the business. Because you want to keep the pending transaction under the radar and limit the impact on your business if the deal does not go through, you assemble the smallest employee team possible to help you with the transaction. You may find yourself requesting files and summaries from various employees in the guise of another business need, copying after hours, and arranging off-site meetings with the acquiror.
To preserve some of your sanity during an M&A transaction, there are steps that you can take in advance to prepare for due diligence.
What Makes Your Business An Attractive Acquisition Target
The documents and information that will be of greatest interest to an acquiror depend on the reasons the acquiror wants to buy your company. Is the acquiror primarily interested in your proprietary technology? Your customer base? Your shared supply needs? Your distribution network? Your skilled labor force? Assess your assets, the competition, and the market to determine what makes your business an attractive target. Understanding this will help you identify which documents and information buyers will scrutinize and therefore require the greatest attention.
You might conclude that an acquiror would be purchasing your business mainly for financial reasons, such as to increase revenue via your key customers, take advantage of your distribution network, or combine purchasing power from suppliers. In that case, you should make sure your key customer, distributor, and supplier contracts are current, signed, and complete, and that they are assignable upon a change in ownership. Determine whether you have obtained and are keeping up-to-date the necessary permits and licenses. Limit the exclusivity or non-compete arrangements with global distribution and supply partners that may impede an acquiror’s business. Your financial statements should also be in good order, audited (if possible), and GAAP-compliant, as the acquiror will likely want to confirm the amount of revenue, profit margin, cost of goods, and other key financial drivers.
Intellectual Property Acquisition
If the main attraction of your business is the intellectual property behind it, then you will want to pay particular attention to your IP portfolio. Figure out which of the IP assets are the likely to be most appealing to buyers and have them thoroughly analyzed to make sure they are properly protected, including perhaps securing IP monitoring services to find other parties who may be infringing. Make sure you have an updated, complete list of all of your IP assets and that a docketing process is in place to ensure that necessary renewals and other filings are timely made. Verify that you have invention assignments from all employees and consultants who have contributed to your technology. Implement physical, technical, and administrative safeguards of your IP and other confidential information. Determine whether there are any existing or potential infringement IP claims that you will need to disclose or that can be addressed beforehand.
Core Records of Every Business
In addition to the documentation relating to your key assets, acquirors or their counsel will examine certain core documents that apply to almost any business. These include, among other things, records relating to incorporation/organization, minutes, stock or other ownership interests, employees, loans, facilities, contracts, disputes, regulatory compliance, and tax filings. With all of these, it’s helpful for your team to get in the habit of maintaining organized files, entering key data into tracking tools, and developing processes to monitor details and meet deadlines. As you deal with the crisis of the day, it’s easy to let organization slip, but the devil’s in the details. During the due diligence stage of a deal is not the time to find out that you are missing signed invention assignment agreements, did not finish papering that stock redemption when so-and-so left, or have not been properly filing tax returns and corporate qualifications in other states.
Preparing in Advance for Due Diligence
These just scratch the surface of what you will be required to gather or prepare and provide. Once you get into house-cleaning mode, you will see other documents and information that need to be organized. Going through this exercise uncovers many matters that require follow-up. Better to tie loose ends when going about “business as usual” instead of scrambling to meet a due diligence deadline.
Establishing good record-keeping habits early or at least well in advance of a transaction will help keep momentum as you work toward the closing, reduce the chances that any skeletons in the closet will become bargaining chips for the acquirer, and preserve some of your sanity.