Are you selling your business—now or maybe later? A thorough Due Diligence process is crucial for a successful sale. In this blog, we explain what due diligence entails, how you should prepare—and why good documentation can be the key to both higher value and lower risk. You'll also find a handy checklist available for download to make the process easier.
This is a situation that many businesses experience during their lifecycle. For employees, managers and owners, selling a business offers many potential joys and sorrows. Some may risk their jobs, the life's work or family business may be sold, the acquisition may provide new career opportunities or free up funds to realize the dream of a lifetime.
Whatever the situation and whatever the circumstances, there is no doubt that the business, employees and owners are facing an intensive and demanding period. An acquisition will usually involve extensive preparations, negotiations and follow-up work.
Due Diligence - often abbreviated to "DD" - is a thorough review of a business that is being considered for sale, purchase or merger. The purpose is to identify risks, liabilities and value drivers before a final agreement is entered into. A typical due diligence process covers everything from financial, contracts, corporate structure and ownership, to matters relating to employees, intellectual property rights and tax liabilities. The process gives the buyer an insight into what they're taking over and allows the seller to document that the business is in order - which in turn can increase confidence and value in a sale.
For the acquisition to take place at all, there are some preparations that need to be made. After the initial contact, most acquisitions will be followed by a comprehensive due diligence process.
In many cases, the DD process comes after the parties have signed an agreement on the transfer of the shares, albeit with the proviso that no significant issues arise from the due diligence. However, a positive company review is often set as a prerequisite for the parties to begin negotiations at all.
Surveys have shown that around 10 percent of all company documents are either lost or misfiled, and that the average cost of retrieving or reconstructing a document is around NOK 1,000. In many cases, it will probably also be impossible to retrieve or reconstruct documents, with the risk that failure to produce documents entails.
Most share transfer agreements limit the seller's liability for damages for information that has been disclosed in a company review, while the liability may be unlimited if there is information that has not been disclosed.
We have also seen several acquisitions fail because the buyer loses confidence in the business and the sellers in connection with the DD process. We therefore recommend that you get an early overview and categorize documents and information that may be of interest to a potential buyer.
Even if the business is not in a situation where it seems likely that it will be acquired, it doesn't hurt to be prepared for a sale by getting an overview of all relevant documents.
We've also found this to be an effective way of conducting internal control. You get an overview of weaknesses and deficiencies in your own business, which can continuously streamline the business and ensure a far less stressful sales situation. Not least, it will be very reassuring for a potential buyer that the company has its documentation in good order.
Download our checklist to get a clear overview of the documents you’ll need to provide during a due diligence process.
If you require legal support throughout the DD process, our experienced lawyers are ready to assist.