A guide to due diligence for first time Sellers

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There are two principle ways in which you can sell the business of a company limited by shares:

1. by selling all of the shares in the company (a share sale);
2. by selling the business of the company as a going concern (business sale).

Either way, a buyer is subject to the maxim of caveat emptor – buyer beware. It is the buyer’s responsibility to ensure that it obtains information relating to the company or business that it is going to purchase. The buyer obtains this information through the process of due diligence. This involves the buyer’s solicitor sending a Due Diligence Questionnaire (“DDQ”) covering issues such as details of the target’s property, main contracts and tax to the seller for its responses.

As a seller, it is on you to respond to this questionnaire comprehensively and in a timely manner to keep your transaction moving forwards. Failure to do so properly could result in a protracted transaction, losing a buyer or a claim post-completion against you. Of course, you have to answer these questions whilst still running your business which can be a challenge in itself! So, here are my top tips for first-time sellers on managing the due diligence process:-

Prepare and Plan

Due diligence can be a lengthy and time consuming process, involving a large volume of paperwork. I suggest that you start collating documentation early and create a checklist of documents you have and documents you may need to request from a third party, for example copies of contracts with suppliers. Being prepared with information, even before Heads of Terms are agreed, will help to avoid delays and can even expedite the transaction. Ideally, you want to start this process 2-3 years ahead of a sale when you are in the initial planning stages for your sale. This will give you and your professional advisors time not only to gather and organise the information, but to process it and address any concerns that a buyer may have in advance of a transaction.

Anticipate Documents Required

As mentioned above, there will be documents that you don’t have to hand, were entered into some time ago or even relationships that aren’t documented at all. You should anticipate this and gather the necessary information sooner rather than later to avoid delays in the deal, or even tipping off a third party that there is a pending sale. The following is a non-exhaustive list of some of the areas covered by a DDQ and the documents required:

• Constitutional Documents: If you are undertaking a share sale, you will be asked to provide your statutory books. These are not the records at Companies House but private company registers which you should have maintained since incorporation. If you don’t know where these are, speak with your accountant or solicitor who may have these lodged with them.
• Assets: You will be asked to verify which equipment, plant, machinery, stock, fixtures and fittings are owned by the company and which are leased. You will be asked to provide copies of the lease agreements, any hire-purchase agreements and the associated terms and conditions as well as valuations for the assets.
• Employment: you will be asked to provide anonymised copies of employment contracts.
• Property: you will be asked to provide copies of leases, insurance documents, planning permissions and EPCs.

Organise your Data Room

A data room is a secure, online platform which allows the seller to upload information which provides evidence to support the responses to the DDQ. The buyer will be able to review the data room. We suggest creating folders and numbering documents in the data room to correlate with the DDQ so that information is presented in an organised way and so that you can cross-reference your responses by referring to documents. Having this carefully organised will be particularly useful when it comes to your disclosure letter.

Answering the DDQ thoroughly and providing supporting documentation will help to ensure that your sales process runs smoothly and protect you from any post-completion claims. It is therefore fundamental to make sure that you get this process right.

If you are thinking of selling your business or require legal assistance in relation to due diligence, contact the Business Services Team on 01604 828282 / 01908 660966 or email BusinessServices@franklins-sols.co.uk.