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Merger & Acquisition Series: Structuring an M&A deal in Australia - Step 4: Do your Due Diligence

Over the coming weeks, the Business and Enterprise Team will take you through the process for structuring an M&A transaction in the Australian marketplace.

Conceptually, buying and selling a house is much the same as buying and selling a business:

For example, prior to purchasing a house, you may choose to obtain a builders’ report. This report tells you what cracks and leaks are associated with the property.

In the same way that a builders’ report works, you may want to (and we would strongly advise that you) make sure there are no ‘cracks and leaks’ with a business that you are buying/selling.

When you go unconditional on the sale and purchase of a business, you want to make sure that what you are buying or selling is not ‘leaky’ or has ‘cracks’ in the way in which it operates. Performing due diligence is an essential element when buying or selling a business.

Why perform due diligence?

Due diligence is generally conducted after the buyer and seller have agreed in principle to a deal, but before a binding agreement is entered into.

Conducting due diligence is the best way for a prospective buyer to assess the value of a business and the risks associated with buying it. Due diligence gives this buyer access to important and confidential information about a business, often within a time period specified in a letter of intent.

With this information you can assess the business's financial position, identify risks and evaluate the potential of the business. It is a prospective buyer’s chance to answer any questions you might have about the business. The due diligence process ensures that a buyer gets good value for a business.

Done correctly, it manages expectations of the buyer and the seller when it comes to the drafting of the sale agreement.

What are the expectations of sellers during due diligence?

In order for the interested buyer to perform due diligence, all of the relevant financial, legal and operational information must be available. It is a good idea to prepare this information when you first decide to sell your business. If you are intending on advertising and selling your business privately without the assistance of a business broker, it will give you the confidence to understand your businesses viability and be ready to deal with interested buyers enquiries.

We would typically organise due diligence folders in the following manner:

  1. Company information
  2. Business Plans
  3. Marketing Materials
  4. Assets
  5. Financials
  6. Tax
  7. Material Contracts
  8. Legal
  9. Property
  10. Information Technology
  11. Employment
  12. Related Party Transactions

A seller may also choose to do due diligence on their own company. This may sound strange, but in a competitive bidding process, a high-level due diligence report is useful for sellers to provide to prospective bidders as part of the due diligence materials, in order to assist these bidders in making a final bid.

A vendor due diligence report is useful when the target company has numerous contracts, which a purchaser may need to review. By providing a high-level overview of these contracts, the purchasers do not have to spend time and costs reviewing all of these documents, and instead, can use the vendor due diligence report as part of “due diligence materials”.

For a seller, it is important to distinguish whether this report is part of the due diligence materials that will form the basis of the warranties to be provided by the Vendor.

Black box information

In a controlled bidding process, if there are various bidders that you would prefer not to show extremely sensitive confidential information to unless they are seriously committed with the sale process, then you may wish to set up a black box data room.

This black box data room provides the strongest form of confidentiality, whereby potential bidders do not have access to this dataroom unless they are provided it by the seller.

The seller will only provide access to this dataroom if a potential buyer provides a ‘Final Bid’ for the purchase of the business.

In the interim period, you may also wish to ‘black out’ certain financial information in your key material contracts, any lease agreements, employment arrangements etc.

Time limit on due diligence

It is important to cap the period of time for due diligence to be performed. If a due diligence period is not time capped, then the warranties provided in a sale agreement may include any information provided up until the signing of the sale agreement.

Next steps

In any commercial investment, we recommend you thoroughly investigate all aspects of the decision and buying or selling a business is no different.

Come have an initial consultation with James Burrell or Nick Hornstein to discuss the best due diligence process for your company. We would be happy to assist you with your immediate next steps.

Who we are

R.B. Flinders’ Business and Enterprise Team predominantly represents founders of businesses who are looking to capital raise or alternatively sell-down from their business.

We know that no deal is the same and that no client is the same. For that reason, we get to know our clients at a personal level and take a pragmatic approach in our dealings with them.

We offer a wide-variety of services that assist our founder going forward, including assisting in their estate planning affairs as well as restructuring their property portfolio for a more advantageous tax position.

We provide ‘health checks’ for our client’s corporate and commercial matters. Please get in touch with James Burrell or Nick Hornstein today for a free initial consultation.

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