In the second of our series of articles entitled ‘Getting Yourself Deal Ready’, Corporate Associate at Mishcon de Reya, Ammar Thair examines the role of Due Diligence in a transaction.
In his previous article, Ammar explored the role of data rooms as a precursor to arguably the most important phase of the deal, particularly in terms of negotiating and progressing the transaction itself – the due diligence stage.
Once the data room has been opened, every interested party alongside their advisors (legal, financial, tax and/or operational) will be granted entry to the library of documents, details and information uploaded. There will be teams of individuals poring through the data, fixated on the details of what has been included, and similarly, what may have been left out. Being prepared for this stage in advance is crucial, in order to (a) avoid any surprises which could threaten the deal, and (b) to maintain a good impression, appearing sophisticated and reassured to an interested party.
Top Tips
- Locate the due diligence checklist (“DD checklist“), and begin to review thoroughly.
- Upload supporting documents and use the DD checklist to structure the data room.
- Continually update the DD checklist, and liaise with your colleagues where needed.
What is included in the DD Checklist?
- A non-exhaustive list of all questions relating to the business, including matters such as the company’s shareholdings, employees, pensions, intellectual property, and a review of the company’s top customer and supplier contracts.
Why start early?
- You will need the involvement of several persons and teams across the business (the management team, HR, and IT), as well as your accountants and/or tax advisors.
- A greater chance of being able to propose your own questionnaire as being the core basis for the buyer/ investor’s review, giving a higher level of control on the transaction, particularly in respect of the volume and type of follow-ups that may arise.
What are the main areas of focus?
- Any liabilities or risks with the company, and evidence to support the proposed valuation of the business (or commercial justification for the proposed investment).
- Commercial contracts with ‘change of control’ clauses (allowing the counterparty to terminate the contract in the event of a sale) or ‘no assignment’ provisions (preventing an assignment or transfer of rights, if the transaction is an asset sale).
- Unduly onerous terms or obligations upon the company (e.g., restrictive covenants).
- Details of share options, litigation, data protection, intellectual property and real estate.
Certain areas of focus will also be sector-specific – for instance, if the transaction relates to a software or technology business, an express assignment or waiver of intellectual property rights may be required in the context of the wider deal.
Otherwise, you should co-ordinate internally to ensure that you have uploaded relevant documents into the data room, including templates of all existing employment contracts, and/or an anonymised spreadsheet summarising the key details of all employees and contractors. This will certainly be requested and will usually form part of the warranties.
Outside of the legal due diligence questionnaire, you should also expect to deal with a range of financial and tax enquiries, and you would need to engage specific financial and tax advisors to assist with preparations and to co-ordinate responses therein. Those advisors will be the experts here, but as a minimum, an interested party would expect to see evidence that your accounts and tax returns have all been correctly filed with no outstanding liabilities therein, and for you to be able to explain any matters suggesting otherwise (and ideally to rectify the same prior to completion).
Ultimately, early preparation at the due diligence stage will allow your legal team to review, rectify and highlight any potential concerns prior to an interested party raising the same, ensuring a streamlined and efficient process for all.
For more information, please contact Ammar Thair, Associate in Mishcon de Reya's Corporate team.
Other articles in the 'Getting yourself deal ready' series:
Disclosure: Getting yourself deal ready.
Data Rooms: Getting deal ready.