Sunday, February 7, 2016

Preparing a Company or Business for Sale: Vendor Due Diligence

Selling a business can be a stressful, time-consuming and resource-intensive process for a vendor and
can often take over six months to complete. By undertaking vendor due diligence, a vendor can
prepare a target company or business for sale, which can in turn result in a smoother, more efficient
and cost-effective sale process for the vendor.

There are a number of benefits that a vendor can derive from undertaking vendor due diligence. First
and foremost, any issues that could potentially affect the value of the target company or business can
be identified and addressed. This can include issues that the vendor may not have been previously
aware of and might have caused embarrassment if later identified by a prospective purchaser. Further,
vendor due diligence can also reveal ways in which the target company or business can be more
favorably presented, or the sale structured to better suit the requirements of the vendor.

With all issues identified and either resolved or addressed, the vendor can be more confident as to the
value of the target company or business and will be prepared to respond to any concerns raised by a
prospective purchaser during its due diligence investigations, which will reduce the risk of the
purchaser seeking to discount the value of the target company or business during the negotiation

Vendor Due Diligence

The phrase “vendor due diligence,” in its broadest sense, refers to the collation and review of
information by the vendor and, in its narrowest sense, the production of a vendor due diligence report.

So as to minimize delays in negotiating or completing the sale, we recommend that the vendor due
diligence exercise be undertaken by the vendor before any approach is made to prospective purchasers. Broadly, in preparing a company or business for sale and undertaking a vendor due diligence exercise, a vendor will need to gather all information that is likely to be required:

  1. by a prospective purchaser in connection with its due diligence enquiries; and
  2. by the vendor to ensure the accuracy of, or disclosure against, the warranties that a prospective purchaser could reasonably require in the acquisition agreement.
The sale process can be delayed if a purchaser, in undertaking its due diligence enquiries, requires
information that has not otherwise been collated or organised by the vendor. Further, if information is
not collated until negotiations with a prospective purchaser commence, there may not be sufficient
time to prepare and check the information properly. This can potentially lead to liability under the
warranties under the acquisition agreement or, when the information is collated, it may disclose a
problem that could have been resolved if identified at an earlier stage of the sale process. In these circumstances, a purchaser will often use this as an opportunity to discount the value of the target company or business.

Reviewing the Information

Once all of the relevant information has been collated by the vendor it will need to be reviewed so as to identify any issues that could (a) potentially cause concern to a prospective purchaser, including issues that might affect the value of the target company or business; (b) cause delay to the sale process; or (c) embarrass the vendor.

Typically, areas of concern that a vendor should focus on include:

  • Corporate records – often these documents are not up-to-date and have been incorrectly completed. This includes incorporation documents; articles of association; shareholders’ agreement; minutes of board and shareholder meetings, etc.
  • Contracts – a prospective purchaser will want to ensure that not only are there proper contracts in place with its key customers, suppliers, landlords and licensors, but that those contracts are capable of being assigned. Any restrictions on the assignability of key contracts will need to be identified early (e.g., consent required) and steps taken.
  • Government licences and approvals – the vendor will want to ensure that all relevant licences or government approvals are current and in force. The vendor should consider renewing any licences or approvals that are approaching their expiry dates.
  • Outstanding litigation disputes – if there are any outstanding litigation disputes, these should be addressed before the sale process commences (to the extent possible).
  • Dealings with connected parties – if the target company or business uses assets, services or facilities of related parties of the vendor, or vice versa, these arrangements may have to be discontinued following completion of the sale or, if not already, put at a satisfactory arm’s-length basis.
  • Third-party consents – it is important to identify what third-party consents, if any, will be required for the sale, including shareholder approval, bank consents, regulatory (i.e., governmental consents) and change of control consents. It can sometimes be prudent to make inquiries with the relevant government departments to ensure that the relevant consents can be easily obtained.
  • Employees – a potential purchaser will want to ensure that all key employees have appropriate employment contracts in place and, where relevant, the proper working visas or work permits. The vendor will need to be able to show that it has fully complied with its requisite Omanisation requirements.
A well-prepared and organized business will be more positively received by prospective purchasers when the time comes to take it to market. A vendor can often attract a higher price where there is an absence of material issues or where well-prepared information illustrates that the business may be easily integrated into the purchaser’s business.

While company owners and management can perform business due diligence themselves, this process can be time- and resource-intensive. Any vendor who is planning to sell a company or business would normally engage the services of outside legal and financial advisers to undertake legal and financial due diligence.

Legal advisors can provide a vendor with assistance in preparing a company or business for sale and conducting a vendor due diligence exercise, for example providing a due diligence questionnaire (i.e., of a type similar to that ordinarily requested by a purchaser); establishing a data room; reviewing documentation; drafting a due diligence report; and providing recommendations and assistance as to the resolution of any issues identified.