SELLING THE COMPANY - due diligence

Posted by: 1. 7. 2024
Update: 4/7/2024

Due diligence, is a comprehensive process of examining and evaluating various aspects of a business before closing a deal, such as a business sale, merger or investment. It serves to ensure that buyers or investors have complete and accurate information about the business and its activities so that they can better assess the risks and opportunities associated with the transaction.

To the extent of the information provided, the seller is allowed to be released from responsibility for facts that the buyer could have discovered in the due diligence process. It is thus in the seller's own interest to reveal the veil of the proposed bride to a reasonable extent and to make information about her available to the buyer and groom.

Types of Due Diligence

We recognize several TYPES of due diligence depending on which areas of the company's activity the investigation is focused on:

1. Financial and Tax Due Diligence

Analysis of financial statements: It involves a detailed examination of accounting records, including balance sheets, profit and loss accounts and cash flow. The aim is to find out the exact financial data about the company.
Financial health assessment: The stability and performance of the company is assessed on the basis of financial indicators such as EBITDA, indebtedness and profitability.
Identification of financial risks: Possible risks associated with cash flow, debts, insufficient reserves or poor financial management are identified.
Identification of tax risks: The subject of investigation is whether the company being sold complies with all obligations arising from tax regulations.

2. Legal Due Diligence

Revision of contracts: Examination of all contractual relationships, including leases, supplier contracts, license agreements, employee contracts and corporate agreements.
Analysis of legal obligations: Identification of possible legal disputes, discrepancies in documentation, deficiencies in the protection of intellectual property and other legal risks.
Analysis of the purity of ownership rights: He finds out whether the company has properly acquired and uses property that is important for its activities.
Assessment of regulation: Any regulatory obligations, licenses and authorizations needed to operate the business are ascertained.
Litigation Analysis: It examines whether the company is facing legal disputes, whether actual or potential, or vice versa, whether the company is not acting as a plaintiff entity.

3. Operative (technical) Due Diligence

Analysis of operational processes: The effectiveness of operational processes, including production, distribution, marketing and customer service, is assessed.
Supply Chain Assessment: The reliability and stability of the supply chain and potential risks associated with suppliers are assessed.
Technology Analysis: Current technology systems and infrastructure are identified and assessed for their ability to support future business growth.
Technique analysis: Assessment of the technical equipment required for the operation of the company, the vehicle fleet, its age and maintenance and other technical background.

The due diligence phase

Setting up a data room: Provision of documents to be examined, whether in physical or digital form, in one place (see below).
Collection of information: The buyer goes through the documents provided and carefully examines what the bride has under the veil.
Additional questions and answers (Q&A): Based on the information he learned from the documents, the buyer asks additional questions.
Data room closing: after the agreed time, the data room is inaccessible to the buyer. A list of the documents, or the documents themselves, which were the subject of review is created and this material becomes an attachment to the company's sale agreement to make it clear what information was available to the buyer.
Discussion of conclusions: At the latest after the closing of the data room, the parties will discuss the findings resulting from the due diligence process and agree whether risks have been identified that should be taken into account in the contractual documentation, and if so, how.

data room

Physical Data Room

A physical data room is a physical space, usually located in an office or conference room, where hard copies of documents relevant to due diligence are stored.

advantages:
- Safety: Physical access to the room allows better control over who has access to sensitive information.
- Security: Documents are physically locked and protected from unauthorized access.
Disadvantages:
- Limited access: Stakeholders must be physically present on site, which may be impractical for those who are not on site.
- Logistics: Managing a physical data room requires organizing, tracking and maintaining documents.

Virtual Data Room

A virtual data room (VDR) is an online platform that enables the secure sharing of electronic documents and information between parties involved in due diligence.

advantages:
- Flexibility: The parties have the ability to access the documents from anywhere and at any time via the Internet.
- Safety: Data encryption, the ability to set different levels of access and monitoring of user activities increase the security of sensitive information.
- Efficiency: The ability to share and update documents faster, which speeds up the due diligence process.
Disadvantages:
- Costs: The virtual data room may be associated with fees for renting the provider's platform or service.
- Technical issues: The possibility of technical errors or outages in the Internet connection may limit access to data.
- Potential security threats: Despite security measures, there may be a risk of data leakage from the virtual data room, especially in the case of hacker attacks.

záver

Utilizing the results of due diligence for further negotiations on the sale of the company includes applying this information in negotiating the terms of the transaction, minimizing risks and surprises after closing the deal, and creating a strategy for integrating the companies after the transaction is completed. This information can also help both parties better understand the value of the business and maximize the benefits of the transaction.

The organization of the data room is a demanding matter and often an unpleasant activity for the seller, especially in cases where the process of the intended sale is to be kept secret from the employees. In such a case, the owner often has to prepare all the documents for the data room (almost) himself. The buyer or his advisers often make requests or questions that sound very illogical and deal with banal matters, or that do not have the correct level of significance of the ascertained facts. Balancing these two approaches is often complex and associated with emotions on one side or the other of the acquisition process. Nevertheless, it is good to "endure", if this happens, another big piece of work in the process of selling the company is behind you.

If the due diligence went well and the buyer put an offer on the table that makes sense to the seller, we move again to the next level, which is the negotiation of contractual documentation. And we'll talk about that again next time.

Do you need advice or representation at sale of the company? Do you have any comments about our series? Contact us! We have many years of experience in selling companies!