Preparing for Due Diligence for the Sale of a Company
Posted by Pierre de la Fortune on January 24, 2015 @ 12:05 a.m.
Written by Macy Stoneback
To preserve some of your sanity during an M&A transaction, there are steps that you can take in advance to prepare for due diligence.
What Makes Your Business An Attractive Acquisition Target The documents and information that will be of greatest interest to an acquiror depend on the reasons the acquiror wants to buy your company. Is the acquiror primarily interested in your proprietary technology? Your customer base? Your shared supply needs? Your distribution network? Your skilled labor force? Assess your assets, the competition, and the market to determine what makes your business an attractive target. Understanding this will help you identify which documents and information buyers will scrutinize and therefore require the greatest attention.
Financial Acquisition You might conclude that an acquiror would be purchasing your business mainly for financial reasons, such as to increase revenue via your key customers, take advantage of your distribution network, or combine purchasing power from suppliers. In that case, you should make sure your key customer, distributor, and supplier contracts are current, signed, and complete, and that they are assignable upon a change in ownership. Determine whether you have obtained and are keeping up-to-date the necessary permits and licenses. Limit the exclusivity or non-compete arrangements with global distribution and supply partners that may impede an acquirorís business. Your financial statements should also be in good order, audited (if possible), and GAAP-compliant, as the acquiror will likely want to confirm the amount of revenue, profit margin, cost of goods, and other key financial drivers.
Intellectual Property Acquisition If the main attraction of your business is the intellectual property behind it, then you will want to pay particular attention to your IP portfolio. Figure out which of the IP assets are the likely to be most appealing to buyers and have them thoroughly analyzed to make sure they are properly protected, including perhaps securing IP monitoring services to find other parties who may be infringing. Make sure you have an updated, complete list of all of your IP assets and that a docketing process is in place to ensure that necessary renewals and other filings are timely made. Verify that you have invention assignments from all employees and consultants who have contributed to your technology. Implement physical, technical, and administrative safeguards of your IP and other confidential information. Determine whether there are any existing or potential infringement IP claims that you will need to disclose or that can be addressed beforehand.
Core Records of Every Business In addition to the documentation relating to your key assets, acquirors or their counsel will examine certain core documents that apply to almost any business. These include, among other things, records relating to incorporation/organization, minutes, stock or other ownership interests, employees, loans, facilities, contracts, disputes, regulatory compliance, and tax filings. With all of these, itís helpful for your team to get in the habit of maintaining organized files, entering key data into tracking tools, and developing processes to monitor details and meet deadlines. As you deal with the crisis of the day, itís easy to let organization slip, but the devilís in the details. During the due diligence stage of a deal is not the time to find out that you are missing signed invention assignment agreements, did not finish papering that stock redemption when so-and-so left, or have not been properly filing tax returns and corporate qualifications in other states.
Preparing in Advance for Due Diligence These just scratch the surface of what you will be required to gather or prepare and provide. Once you get into house-cleaning mode, you will see other documents and information that need to be organized. Going through this exercise uncovers many matters that require follow-up. Better to tie loose ends when going about ďbusiness as usualĒ instead of scrambling to meet a due diligence deadline. Establishing good record-keeping habits early or at least well in advance of a transaction will help keep momentum as you work toward the closing, reduce the chances that any skeletons in the closet will become bargaining chips for the acquirer, and preserve some of your sanity. Macy Stoneback is a senior paralegal for AlphaTech Counsel, S.C. Macy has over fifteen yearsí paralegal experience in corporate governance, private and public offerings, mergers and acquisitions, equity administration, real estate, trademarks, contract drafting, and contract management and administration. For the four years prior to joining AlphaTech, she served on the legal team of a medical device company through its initial public offering. Prior to that position, she worked for nine years in the downtown Madison office of a large Wisconsin law firm. Her paralegal career started at a Chicago suburban firm in 1994. For more info please visit: http://alphatechcounsel.com/
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