The due diligence process can be an arduous and expensive undertaking, as previously noted by Sara Josselyn on this blog. While there is no specific approach to due diligence, it is no longer perceived solely as a buyer's burden. More sellers are conducting what is referred to as "'sell-side" or "internal due diligence" to attract sophisticated buyers, improve negotiations and potentially enhance the value of the transaction. This approach is gaining momentum, and coupled with today's low interest rates, may lead to an increase in M&A deals in Canada.
Tell and tailor the business story
Sell-side due diligence is best commissioned by a seller before a potential buyer has been identified. Sellers are in the best position to conduct internal due diligence and tell their story. This allows a seller to take control and rectify potential issues within the business and take corrective measures early, as opposed to having such points used as negotiation tools by the buyer later on. In addition, sell-side diligence allows sellers to tailor their story, increase transparency and promote their credibility and good will.
Increase valuation
Often the objective when selling a business is to capture the highest valuation possible. While a number of factors drive deal valuation, a company's prospects, competitive landscape, economic conditions and deal structure, among many others, can have a dramatic impact on deal value. Incomplete or inaccurate information, particularly financial data, may have a direct, negative impact on sale price. Conversely, sell-side due diligence and reducing uncertainties about the accuracy and reliability of information being provided may make a potential buyer more willing to pay full consideration – or even a premium.
Due diligence... on the buyer
Being proactive and conducting internal due diligence early in the sales process may then provide a seller time to conduct due diligence on a prospective buyer. When selling a specialized business, such as a franchise or technology company, a seller may want to examine the expertise of the acquirer's management team and its experience in a particular industry.
The seller will also want to ensure the buyer's ability to pay the purchase price – this is especially true when the buyer is making deferred payments. The seller will want to ensure a large down payment and evaluate the buyer's collateral. Although the purchased business or assets are generally used as collateral for the remaining installment payments, other assets could also be considered as possible sources. Where there's an earn out, the seller may want to ensure the adequacy of working capital to operate the business immediately after purchase and ensure that the buyer has a plan to successfully run the business.
Conclusion
M&A deals are, and have always been, challenging to close. Buyers are less likely to spend time on transactions that will not ultimately proceed to closing, allowing them to focus their attention on only the most attractive opportunities. A proactive seller can increase the chances of an acquisition, expedite closing, maintain control and increase its valuation. Sellers should never underestimate the value of understanding their buyer and the power of introspection. They may want to roll up their sleeves and engage in some heavy lifting early, or better yet, they can get their lawyers to do it.
Norton Rose Fulbright Canada LLP
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