The due diligence offers a potential buyer a chance to examine the accuracy of the information provided by the seller. To achieve a successful sale, it is important for a seller to prepare properly for such an examination.
This is because the due diligence is an important part of a business acquisition. It charts a company's financial, legal, fiscal and commercial situation (among other things). To achieve a successful sale, it is therefore important for a seller to be well prepared for the due diligence, so that the potential buyer will not encounter any so-called skeletons in the closet.
This expert contribution briefly touches on a number of topics that we have encountered several times during a due diligence and that also affected the final purchase price.
Realization of forecast
At the start of a sales process, a (very) positive profit forecast is often issued by the entrepreneur. At the moment that a book examination begins, usually several months later in the process, the actual profit realization turns out to be a lot lower than the previously issued forecast.
This then often results in a decrease in the potential buyer's willingness to pay, as the business case becomes more challenging. A new negotiation situation arises. For this reason, it is important to prepare a feasible forecast at the beginning of the process, which can also be realized during the months of the sales process.
Therefore, it is also advisable to continuously monitor the development of the company's results during the sales process. And in case of any material deviations, whether positive or negative, inform the buying party about this already immediately.
Intellectual property
Examples of intellectual property include trademark, name, website, social media accounts or new self-developed (software) products. Intellectual property can have great value and is therefore relevant in a business acquisition.
The following matters are important to clarify in advance, since the value of the IP rights for potential buyers depends on them: whose name is the right in, which third parties have a license to the right of use, is the right transferable at all (this is not the case with every IP right) and how long is the right still valid. Mapping this out in advance prevents a lot of discussion during the process.
Collective bargaining agreement: complies with business collective bargaining agreement
In a business acquisition, the acquiring party is often required to continue to enforce all rights and obligations under the collective bargaining agreements that the employees entered into with the previous owner. During the book examination, a potential buyer will closely study the applicable collective bargaining agreements to ensure that the collective bargaining agreements in place do not have any adverse consequences.
When a company grows or shrinks in staff size or adds or disposes of business activities, collective bargaining agreements that were previously followed may no longer actually apply. Failure to apply the correct collective bargaining agreement can lead to increased industry contributions, higher pension payments or claims from employees that can be retroactively filed against the employer.
These are risks for buyers, which have a (financial) impact. Therefore, it is essential to have matters around the CLAs in order prior to a sales process.
Investment backlog
The level of annual investments also plays a role in determining the value of the business. If, during a book examination, it is found that there are actually investment arrears, for example in the area of automation, this can have a negative impact on the agreed purchase price. This is because it means that certain replacement obligations have not (yet) been done and a buyer will have to take care of this after an acquisition.
Such a required investment puts a strain on cash flows and thus affects the value of a business. Therefore, it is important to maintain the level of investment especially in view of a possible sale. Then the level of investment can no longer be a discussion that affects the final purchase price.
Identifying the possible risks that may emerge during a due diligence is of great importance. Good preparation is often half the battle and makes it possible to reduce the possible (negative) impact of certain risks. If you are considering selling your company, call in an experienced adviser in good time!
