M&A deals aren't easy to close. As we previously reported, due diligence typically increases the likelihood of a deal closing. Buyers often conduct extensive diligence: they analyze the financial documents, projections, contracts and other relevant information pertaining to the target company. However, due diligence completed by the seller, alternatively known as "sell-side" due diligence, is also an important step towards successfully closing a transaction.
Sell-side due diligence often entails the seller providing information on the company's projections, its competitors and relevant current economic factors. In turn, ensuring that the information being relayed to the buyer is accurate will have an impact on the impending deal. Additionally, sell-side due diligence involving researching potential buyers after the company has gone to market can be particularly valuable.
Sellers need to know much more about a prospective buyer than the price they are willing to pay. A recent article highlighted the following steps when completing due diligence on a buyer.
Evaluate the buyer's offer
Often when a company goes to market, it can receive interest that has no intention of turning into a deal. An example is how some investment banks will approach a prospective seller by stating that they have an interested buyer, but will only attempt to find a buyer when the company or owner indicates that they will sell. Another sign that an offer lacks the intent of following through is when a potential buyer states that they will pay much more than what the company is worth. This could be a signal to the seller that the buyer has not done its due diligence on the company. Therefore, qualifying the bidder to assess how serious they are in buying the company is an important first step.
Understand the buyer's deal history
Researching the buyer's history of the deals they have closed in the past can be very informative for a seller. The buyer may have a tendency of making offers, but not closing. Understanding the past behaviour and patterns of buyers may shed light on how they will act once they make an offer.
How a buyer will finance the deal
Understanding what financing commitments a buyer has or how soon they can receive funding for the deal can be significant to the likelihood of the deal closing. The article also suggested that it is important to know what the buyer's assumptions relating to their offer price are. Knowing this information will be helpful for sellers when negotiating with the buyer.
The buyer's intention and ideas for the company
A seller should consider what a prospective buyer's plans are for the company. Perhaps the buyer is intending to replace key employees or significantly alter the structure or vision of the company. Knowing whether a buyer will change the company immensely or maintain the company's existing direction and strategy may be crucial to deciding which offer to accept.
While it was has been noted that sell-side due diligence is most useful when done before a potential buyer is in the picture, due diligence relating to a prospective buyer also has its benefits.
The author would like to thank Monica Wong, Articling Student, for her assistance in preparing this legal update.
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