Due diligence in 'mergers and acquisitions

It will come as no surprise that thorough due diligence in any acquisition is seen ?as fundamental for the buyer. However, where should the due diligence exercise feature on the seller’s list of priorities?

The disclosure exercise serves several purposes from a seller’s perspective. First, it provides a rare opportunity for a seller to take a detailed look at all aspects of its business and remedy any issues which might affect the appetite of a buyer. Second, it enables the key pricing issues ?to be addressed and the deal structure to be agreed. Third, ?it qualifies the warranties in the sale agreement and acts as a key seller protection.

Unfortunately, very often ?the focus of the seller is on the wrong part of the process.

The normal course of a transaction tends to be that ?a buyer will express an interest ?in a target. If the target/seller ?has initiated this by looking for potential suitors, then the first purpose of disclosure may have already taken place and the potentially unattractive business aspects (such as awkward minority shareholders, poor terms and conditions, or absent employment contracts to name but a few) may already have been identified and addressed.

Then follows the often drawn-out negotiation of the sale agreement and the scope ?of the warranties, followed by a laboured and frustrating formal disclosure exercise.

Dealing with the process in a structured and sensible fashion can both ease the frustration of the exercise and maximise the benefit/minimise the risk to ?the seller.

Important steps

• Advisers: Probably the first, albeit slightly self-serving, ?tip would be to get advisers instructed as soon as the process begins. They don’t have to be on the front line ?(in fact, it is better that they aren’t during the early stages) but they can at least ensure the right steps are followed;

• Don’t underestimate the process: Ensure someone is identified who has access to the information and time to commit to the process;

• Confidentiality: Do nothing without a robust non-disclosure agreement (NDA) in place, and make sure it binds the right parties;

• Access to staff: Agree at the outset who the buyer can have access to, and ideally make this part of either the NDA or heads of terms. Nothing unsettles staff, customers, or suppliers ?more than rumours of a possible sale;

• Keep the process offsite: ?A potential buyer speaking directly to employees is ?only slightly more of a pending deal giveaway ?than the sudden appearance of unknown besuited individuals walking around the office; 

• Copy everything: One of the most common phrases heard from a seller is: ‘I’ve already told the buyer this.’ Although there is an argument about actual knowledge limiting the remedies/recovery of a buyer if it still proceeds to completion, the only sure way to protect a seller is to formally disclose issues in a disclosure letter. Taking copies of everything given ?or shown to a buyer from ?the outset ensures, first, that there are no disputes as to what the buyer knows, and second, that when the seller ?is told they have to do the exercise a second time because telling the buyer ?isn’t enough, they can simply pass the relevant copy file over and save time, effort, ?and frustration;

• Focus on the right areas: Rather than worrying about the precise wording of every warranty or spending hours haggling over the de minimis levels, a thorough disclosure exercise deals with the issues at the source and is the?best way to avoid any claim. Time spent on this is rarely wasted; and

• Nothing is too trivial: ?Don’t second guess what ?a buyer needs to know. Disclose anything, however seemingly insignificant.

Following this process is the best way to achieve the principal goal of the legal adviser – to ensure the seller not only gets the money from a sale, but keeps it.

Ian Vicary is a partner in the corporate team at Weightmans@Weightmanswww.weightmans.com