Undergoing due diligence
All answers are for general guidance only. Each case must be handled on individual facts.
Q: What can I expect when undergoing due diligence and how do you minimise opportunities for “price chip”?
There are several things which can be done to minimise opportunities for a “price chip”.
• If the business is being marketed it is very sensible to uncover potential problem areas and decide how to present these in the Information Memorandum.
• Some purchasers use the due diligence process to aggressively reduce the purchase price and at the other extreme are those who seek to confirm that the information used to calculate the purchase price is correct so that they can pay the agreed amount. Wherever possible, agree to sell at a sensible price to a well-funded party that has a reputation for paying the price agreed in Heads of Terms. Such organisations and people do exist!
• Forethought and experience are important in trying to identify areas of potential problems. By considering where the due diligence provider is likely to focus enables a good adviser to ensure that these areas are carefully considered and quality information is provided. Money could be very well spent on carrying out vendor initiated due diligence at an early stage. This is a useful way to check whether the company’s key agreements and records are in good order.
• It is important to ensure that the initial information provided is of good quality and comprehensive as it is easy for the due diligence provider to get a bad first impression and thus be concerned about the underlying quality of other information. As Tom Peters remarked, an air passenger who sees coffee stains on his tray table may justifiably question how well the engine has been maintained.
• If unexpected issues arise during the process, the impact of these must be carefully considered and any mitigating factors should be clearly presented to the buyer to counteract the downside in any negotiations over price.
• Good news obtained during the process, in the form of client wins, significant new contracts, cost savings, profits in excess of budgets/forecasts etc, should be communicated to best effect. This may involve saving the information to counter adverse issues in negotiations.
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