Selling a business is a major milestone that requires careful planning. Proper preparation ensures a smooth transaction, can maximise valuation, and attract appropriate buyers. Sellers can take a pro-active approach and prepare their business for sale by engaging in pre-sale due diligence.
Pre-sale due diligence is an internal review process undertaken by potential sellers to address any issues relating to legal, financial or operational aspects of their business before they go to market.
Benefits of Conducting Pre-Sale Due Diligence
- Reduces any Unwanted Surprises – Buyers will conduct their own due diligence and so addressing potential ‘red flags’ in advance reduces the risk of delays or renegotiations.
- Seller Control – Enables sellers to review and compile documents at their own pace, without the pressure of deal deadlines. With no transaction in progress, confidentiality concerns are minimised, allowing employees to assist with the internal review. This also allows sellers to focus more on their day-to-day responsibilities both during pre-sale due diligence and buyer due diligence as the majority of the requested documentation would have already been gathered.
- Speeds Up the Sale Process – Resolving issues beforehand ensures smoother negotiations and a quicker deal timeline.
- Builds Buyer Confidence – Transparency and readiness reassures buyers and make them more eager to proceed with the purchase. Such confidence can also strengthen relationships between seller and buyer, which is particularly beneficial if the seller is expected to remain involved in the business for a period after the sale.
Areas of Pre-Sale Due Diligence
A pre-sale due diligence process can focus on key fundamental aspects of the business or be more comprehensive, mirroring the in-depth review that may be conducted by a potential buyer.
Key areas where issues commonly arise, and should therefore be addressed in a pre-sale due diligence process, include:
1. Legal Structure and Governance
- Review the company’s legal structure, including its shareholding and articles of association.
- Ensure compliance with relevant laws and regulations.
- Verify that all required filings and statutory registers are up to date.
2. Key Contracts and Agreements
- Review employment agreements to confirm contractual obligations, compliance with current employment laws and any restrictive covenants.
- Review supplier contracts to assess exclusivity, change of control issues and termination rights.
- Review customer contracts to identify key clients, written terms and potential risks.
3. Intellectual Property (IP) Rights
- Confirm ownership of all IP rights.
- Review any licensing agreements to ensure the appropriate consents are in place for any third-party IP rights which the business relies on.
- Ensure all IP rights are properly documented and registered where necessary.
4. Financial and Tax Compliance
- Conduct an internal audit of financial statements to verify accuracy and consistency.
- Identify any outstanding tax liabilities, unpaid dues, or compliance risks.
- Ensure that all financial records are transparent and up to date.
5. Operational and Risk Management
- Identify any inefficiencies that may need to be addressed before the sale.
- Review compliance with data protection laws.
- Address any ongoing legal disputes or potential litigation risks.
Conclusion
Pre-sale due diligence is a valuable step for any business owner looking to sell. Investing time in conducting this internal review will ultimately lead to a smoother, more efficient transaction and a more attractive business for potential buyers.
The information provided in this article is provided for general information purposes only, and does not provide definitive advice. It does not amount to legal or other professional advice and so you should not rely on any information contained here as if it were such advice.
Wright Hassall does not accept any responsibility for any loss which may arise from reliance on any information published here. Definitive advice can only be given with full knowledge of all relevant facts. If you need such advice please contact a member of our professional staff.
The information published across our Knowledge Base is correct at the time of going to press.
