When you’re so close to the hammer falling on a potential deal, it can be easy to miss out on key details. But a little preparation can prevent a lot of wasted time and revenue
Given that it’s often the culmination of all of their efforts, it’s unsurprising that entrepreneurs need to protect from any missteps that might occur during the exit process. One only needs to look at the fallout between HP and the former owners of its Autonomy purchase, after claims surfaced that the tech giant feels the business was overvalued, to see that it’s important to take the time to employ due diligence. After five years’, ten years’ or even a lifetime’s work, it’s not worth blowing an all-important deal or, even worse, be dragged through the courts as a result of being too hasty.
The period of due diligence typically starts shortly after legal consultation begins on the deal and a lawyer has drawn up a non-binding heads of terms letter. “It’s usually at that point where the parties commit to a period of exclusivity when they’re going to focus on that deal and that deal alone,” explains James Waddell, partner at law firm Stevens & Bolton. “That gives the buyer some certainty that it’s going to start spending money and it’s not going to find the deal has been sold to someone else.”
Typically, this is when enterprises engage in due diligence with the specifics of financial and legal elements of the business, ensuring that everything that may be of concern is taken into consideration. Often this is conducted jointly with legal and financial consultation, attempting to smooth out any hidden snags. “At a certain point the buyer will feel comfortable enough that they’ve got the information they need to start drafting contracts and see that process through to the finishing line,” Waddell says.
Unfortunately, as with true love, the course of these things rarely runs smooth and expecting to just coast into a secure and binding deal is more than a little unrealistic. More often than not a lot of businesses would benefit from keeping their eye on smoothing the way for exit, long before they ever start attempting to engage with buyers. “Extended periods of due diligence don’t necessarily kill a deal, but they do significantly impact upon timing and cost,” says Waddell. “So there is no substitute for being well prepared in the run-up to the process.”
First of all, one thing Waddell would suggest is that things need to be considered from the point of view of a potential buyer and specific attention needs to be paid to the areas that are likely to be of key interest. “Would it effectively just be buying your customers?” he says. “In which case, you need to focus on long-term customer contracts being very clear with regard to terms. Also, would they be buying key staff? In which case, focus on service agreements and restricted convernance. Or is it the property? Or the IP?” By first focusing on the areas that are going to carry the majority of the load, an enterprise can build a stable foundation for the later, more intricate details.
Obviously, this begins to raise an issue with how much access you have to necessary data and information within your organisation. “Who are the gatekeepers for information?” Waddell asks. For the majority of enterprises, the fact that they are beginning to look towards an exit is considered to be on a strictly need-to-know basis but often these are the very people who will have access to the sort of information buyers will need to know. With this is mind, it’s necessary to consider how you handle information within the company. “You might want to start thinking about keeping key employment information in a format that you don’t have to ask for, doing your reporting in a way that you’ve got that information to hand,” he says.
Another good reason to start addressing these things ahead of time is connected with conflicting interests in the run-up to a sale. While you and fellow equity holders might be willing to work every hourunder the sun getting things watertight, ground- and middle-level staff aren’t so strongly incentivised. Unfortunately, here a bit of tact and a much longer run-up period to minimise excessively high workloads, are about the only solution that can cover everyone in the business. “There isn’t a silver bullet to it,” Waddell comments. “The reality is all you can do is be mindful of those issues as you go into a process and try and mitigate them as best you can.”
But presuming you put in all the groundwork and both you and your buyer carry out significant periods of due diligence, what can you do in the rare situation that the proverbial does hit the fan post-sale? How can you navigate your way out of the aftermath?
In theory, it’s simple. As long as every element of due diligence has been carried out, a company’s obligations should be covered by the contract. If it has misled the buyer in its representation of what is being bought, it will be viewed as fraud and pursued through the courts. However, where it becomes more complicated is if the fraudulent representation is on the part of a party like an external financial controller. “Obviously, if it’s one of the principle contracting parties on the sales side, it’s pretty clear who’s at fault,” says Waddell. “If it’s somebody where it’s slightly less clear who’s responsible for that person, then it’s a bit harder to know where the liability will fall.”
As with other areas of business, a little straight thinking, careful planning and consideration of issues ahead of time can prove to be the best defence an entrepreneur can employ against a golden deal turning sour. It just needs a little proactive management. As Waddell concludes: “You can make the process smoother, less disruptive for you as a businessperson, more certain to conclude in the right way and ultimately cheaper if you’ve done your homework right and prepped.”