Transactions - what to plan for

Due diligence before buying or investing into a company

If you are contemplating any significant transaction from buying a company, a private equity investment or an MBO, experience tells us time spent on planning for the transaction will pay off.

To help you manage the transaction process we explain the likely important initial steps.

Start with a confidentiality agreement

Confidentiality and exclusivity agreements deal with a variety of concerns. Without a confidentiality agreement :-

• There is no obligation to keep anything confidential unless there is a specific agreement. Even with an agreement enforcing breach confidentiality is difficult and expensive in practice - best advice is to be careful what you disclose.
• There is an increased risk of a waste of  your time and money -  an agreement can limit the risk by specifying an exclusivity period during which a seller agrees to only discuss the sale or investment with the buyer, which encourages the seller to commit to a deal.

Before you get to heads of terms stage

Most buyers once they have signed the NDA want to see an overview of the business.
It helps if you have ready lists of:
- Key employees;
- Key customers;
- The split of the revenue for the last 3 years at least;
- Funding rounds;
- Latest management accounts;
- Approvals required from landlords, banks, contractual releases, majority shareholders, etc so that the buyer knows what he could be getting into.

• If you are a small private company the chances are the buyer will be a larger company which teams of HR and number crunchers equipped with resources you do not have. You need to make a good impression so the answer is get prepared in advance. A good broker can help you put together an information pack in readiness. Or talk to us and we can guide you.

Heads of terms

The heads of terms set out the basics of the deal. You’ll reduce your total costs, if you take time and care over the heads of terms agreement because it cuts down on the drafting. Heads of terms should be prepared at the beginning of the transaction and are a good way of flushing out problems.

The heads of terms typically include:

• The agreed price: which should be subject to due diligence and completion of the share purchase agreement. If the price can be adjusted for developments taking place during the process of buying a business then the mechanism for adjustment should be dealt with.
• The timeframe: for completion of the acquisition.
• Targets and earn-out terms:  which often include requirements that key players remain employed after the acquisition for a defined period, for example a finance director. Deferred consideration is linked to post acquisition performance. This helps protect your investment in the target company.
• Shares: if you will gain new shareholders, then set out the basic requirements for holding shares.  Rights can be covered in the articles or shareholders agreement. Distinguishing between good and bad leavers is always advised.
• Financing requirements: which might set-out for example whether completion depends on the purchaser’s bank approval, the terms on which other shareholders inject share capital to finance the acquisition or if the seller willl be required to pay down existing bank borrowing and sell debt free.

Data room

Once the buyer and seller are happy with the outline heads of terms the data room is created. There are various products available to manage the data but care is needed as in prolonged transactions the costs can mount. Feeding from the data room is production of the disclosure letter which is an important stage for sellers. In simple terms if disclosed the buyer will not be liable. The data room will forms the documents the buyer will acquire. Buyers use disclosure to adjust the price on some occasions.