8 July 2019
It’s probably stating the obvious that one of the biggest challenges in a business sale process is getting through due diligence. Most times there’s a lively discussion about what constitutes a 'normalised level of working capital,' and the related debt or cash adjustments, but these discussions tend not to derail a sale process. Other issues identified during DD may do, however.
Whilst some of these issues, an overly aggressive revenue recognition policy, for example, might affect a buyer’s view on Enterprise Value, most tend to involve significant potential future liabilities. These may stem from ongoing litigation, from tax-related matters, or perhaps regulatory compliance.
Crystallisation of liabilities
A buyer’s resolution to these issues might be to draft wide-ranging indemnities in the Share Sale and Purchase Agreement (SPA) which will leave the seller on the hook, bolstered by a retention of consideration (normally utilising an Escrow account) to cover any crystallisation of liabilities covered by the indemnities post completion. As a seller, you may be on the back foot at this point in proceedings as your view on the risk of the liabilities crystallising may be very different to the buyer and its DD teams.
Vendor Due Diligence
An often-overlooked early stage of a sale process that can forewarn and forearm you as the seller is Vendor Due Diligence. This is, if you like, a dress rehearsal for the real thing in that you’re effectively asking your own advisers to highlight the key risk areas that will come up in the sale process. The benefit is that you, and your advisers, will have the opportunity to determine an approach to mitigating risks, or you can decide that some matters should be closed off altogether (e.g. settlements to end litigation) before you embark on the sale process. Having an awareness of the big issues in advance will also serve to take some emotion out of things.
UHY has expert advisers in offices throughout the country should you wish to discuss vendor due diligence, or a business sale process more generally. Please get in touch or visit our Corporate Finance page for more information.
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