Due diligence is an important part of sell a business. After all, such a sale requires more than a competitive price; a well-prepared due diligence can make all the difference.
Under Dutch law, in a sale, the seller has an obligation to disclose and the buyer has an obligation to investigate. The delineation of both obligations is laid down in the purchase agreement and the letter ofintent that usually precedes it. Especially in that letter of intent, agreements are made about the scope and organization of the due diligence.
Risks and concerns
As part of that due diligence duty, but of course particularly to avoid disappointed expectations, the buyer should verify whether the information provided earlier is correct. For example, the buyer will want to verify whether the figures presented are correct, whether they are not influenced by one-time benefits and whether the normalizations made are real, etc.
On the other hand, due diligence is designed to identify potential risks and concerns that may affect the value or future operation of the business. Therefore, the investigation covers all business aspects. Examples include tax risks, employment law issues, contract terms, ongoing disputes that may have financial or operational implications, whether the company complies with relevant laws and regulations, and whether there are any hidden liabilities or latent claims.
It is also important to check whether there are any ongoing or anticipated investigations by the tax authorities or regulators (such as ACM and the Personal Data Authority). Furthermore, it is important to examine the consequences of a takeover: do the main contracts contain a so-called change of control clause under which the other party can terminate the agreement if the company acquires a new owner? The operational side of a takeover also deserves attention: what is needed to integrate the company to be bought in order to be able to use the intended synergy benefits as soon as possible.
Good preparation
The clearer and more complete the seller can present information to the buyer, the smoother a due diligence will go. Therefore, proper due diligence preparation usually leads to a smoother sales process. In some cases it is wise for the seller, prior to the actual sales process, to have its own due diligence conducted on potential risks; so-called vendor due diligence.
This will give the seller a clear understanding of the existing risks and their extent so that they can be resolved, possibly in advance, or discussed with the buyer. This will usually strengthen the seller's negotiating position and at the same time help to avoid problems, misunderstandings or irritations during the negotiation process.
Dataroom
The next step in the due diligence process is to upload and structure the information collected into a data room. A data room is almost always a digital, secure platform set up specifically for the secure sharing of confidential documents with external parties. It is important that the information is clearly categorized so that buyer and its advisers can efficiently navigate through the information provided. Once all relevant documents have been uploaded and the structure carefully set up, access can be granted to the potential buyer. This is done only after the buyer has signed a confidentiality agreement to ensure that the information provided remains confidential.
If very sensitive commercial information is also made available, it is usually preferable to make it available for inspection only after it has become clear that no major objections have emerged from the first part of the due diligence investigation. Incidentally, alertness is also important during the investigation. Questions should be answered promptly and consistently. It is also preferable that management interviews be prepared.
After completion of the due diligence, the contents of the data room are archived. In this way, discussions afterwards are avoided as much as possible. Suppose after the transaction, the buyer claims that certain risks or issues were not shared by the seller, the seller can use the archived copy of the data room to prove that the information in question had indeed been made available. After all, if this information was made available, the buyer could have been aware of these identified risks.
Additional collateral
If the due diligence reveals that there are risks associated with the business, this may prompt the potential buyer to include an indemnity, require additional collateral (such as a bank guarantee, escrow arrangement and the like), adjust the purchase price, stipulate that further steps should be taken before the transfer of the business, adjust the structure of the purchase (for example: not the shares but the assets of the business are taken over) or even abandon the purchase altogether.
In short, due diligence is a crucial step in an acquisition and it is therefore very important that it be carefully prepared by the seller.
