What is the Due Diligence investigation?
Due diligence is the oft-heralded ‘nightmare’. It is a rigorous and extremely probing examination asking questions about every aspect of the affairs of your company. The most common time this will occur is when a buyer wants to buy a ‘going concern’ business. The information requested covers past years, the present time and commitments made into the future made by the company or its representatives.
Due Diligence requires you to provide ‘full and fair disclosure’ in response to all questions. You will find this investigation is disrupting, disturbing and more than possibly frustrating. But it is an essential step that buyers or investors will always take usually through a reputable business broker such as TBAC.
You should know about Due Diligence very early on in your company evolution. Sometime, somehow, it is a process that will surface. Clever and careful organization of your company records from the early days can make the process less arduous.
The impact of the Due Diligence investigation
Due Diligence is the part of your negotiations which allows a prospective buyer/investor to gain reassurance that your company is a viable proposition with minimal risk attached. The result of the Due Diligence analysis could have dramatic repercussions:
The buyer/investor confirming their interest
The buyer/investor becomes nervous about the company.
The buyer/investor may be persuaded to pay more for the company.
The buyer/investor reduces their bid/offer price for the company.
The buyer/investor may want to construct the deal differently.
The buyer/investor withdraws their offer.
The buyer/investor wanting to retain a portion of the purchase monies for a set period of time after closure on the business.
You will be naturally nervous that revealing sensitive information can have the following results:
Exposure of confidential company matters to outsiders or competitors could damage future trading if the deal should not proceed to completion
Unscrupulous buyers could feign interest in your company and its methods/operations, find out all they can via Due Diligence examinations then, having withdrawn from the negotiations, go off to set up a similar competing business.
Being such an interrogative process, you should treat Due Diligence with caution, releasing only fairly general information. It is sensible at this stage to hold a discussion with a reputable business broker such as TBAC about the precise disclosure of the ‘sensitive data/information’ that will be requested. Build a strategy for disclosures with your business broker then follow it very closely. When in doubt always check with your business broker first. Each company will be different as to what could be damaging to its future operations in the event of the deal not being completed.
But be fair
Equally it is only reasonable that buyers know what they are letting themselves in for. So, bite the bullet and tread a fine line of declarations and disclosures during the Due Diligence.
Should you hold back information?
There will be a natural reluctance to tell buyers some information in case the deal is killed off by its revelation. It would be tempting to keep quiet if you are aware that a client’s contract is not going to be renewed. Or perhaps that some of your stock is damaged and of no real value. Or the most common potential problem in Pattaya is the terms and conditions of your lease (if the premises you are trading from is leasehold). Holding back such information would be pointless especially when it comes to leases as 99% of the time the deal will be subject to the terms and conditions of obtaining a new lease.
You may well be required to give imdemnities and warranties against misleading or inaccurate replies. Don’t be tempted to give partial or incorrect replies. It is much better to give full disclosure, but keeping these replies low key, without any undue emphasis that would be discouraging to buyers.
Be honest and open with your business broker from a very early stage, pointing out aspects that you believe could be problematical to the deal so that they are prepared for these difficulties. Business brokers hate ‘nasty surprises’.
Due Diligence is a pain that will have to be endured if the deal is to proceed to closure.
Should you be considering selling or buying a business in Pattaya contact TBAC first on 087 283 5349 or email [email protected] or visit our website www.businessbrokersasia.com. We look forward to receiving your enquiry.