A crucial component of any company sale is transparency and accuracy for a proposed buyer and the safeguarding of an agreed sale price for a seller, whilst maintaining strict confidentiality from the outset and throughout the transaction process.
We spoke to Corporate Director, Andrew Dodd, about the imperativeness of data rooms and due diligence when selling your business.
What is due diligence and why is it conducted?
Andrew Dodd: Due Diligence is the investigatory process undertaken by a prospective buyer to establish the creditability of a target business, prior to completing the relevant legal obligations required when entering into a financial contract. It is a practice commonly utilised to examine all relevant aspects of a company’s past, present and predicted future performance, giving ‘peace of mind’ to the buyer that the business is what it appears to be.
During the process, significant documentation such as financial statements and business plans are made available to the buyer for careful consideration. In addition, the buyer will spend time at the business’ location, speaking to members of staff and familiarising themselves with the day-to-day aspects of the company.
The purpose of the process is to guarantee a certain standard of care is met, ensuring the information presented is transparent and correct, which ultimately allows the purchaser to make an informed decision. This alleviates the element of ‘nasty surprises’ which can often arise if due diligence is not practiced.
How do data rooms facilitate this process?
AD: A data room is a virtual space used for housing data which is of a privileged or confidential nature. A data room is populated with the important documents of the vendor, which is then made available to interested parties. The space operates as a safe arena to not only exchange information but to also ask questions and receive answers.
Data rooms are hugely beneficial to all parties as they permit the movement of sensitive documents in an efficient and private manner. The evolution of Virtual Data Rooms has revolutionised the due diligence process for M&A deals over the last several years. What was once a lengthy and strenuous process is now simple and efficient.
Why is it so important to maintain confidentiality and how do you secure this?
AD: The vast majority of sellers will be very prudent when disclosing personal information regarding their financial affairs, in trepidation of this information ‘falling into the wrong hands’. At KBS we do our utmost to protect our clients’ private details, safeguarding all commercially sensitive information we receive. Before we disclose any confidential information to a potential buyer, we require all interested parties to submit a Non-Disclosure Agreement (NDA), agreeing to not divulge any information which is protected under the contract.
How does KBS Corporate integrate data room into its methodology?
AD: Once a business has come to the market and all the relevant marketing documents have been created, such as the Information Memorandum, the company will then be considered as ‘live to market’. We will then obtain multiple interested parties off the back of the marketing materials, some of whom will put in an eventual offer. Our client will then consider these offers and once they have decided on the most suitable offer, Heads of Terms will be issued.
At this stage of the process, legal representation will be introduced on both sides and a data room will be opened. Typically, the solicitor representing the buyer will approach the vendor with an information request, which is a checklist of queries the buyer has regarding the company. The Deal Executive assigned to act on behalf of our client will deal with this request and publicise the relevant information into corresponding folders within the data room. KBS Corporate will then give permission to the appropriate parties to access the information.
Traditionally, KBS Corporate and one of our nominated legal service providers will have full access to every area of the data room. Similarly, the seller will have full access but will be unable to delete or edit content. The vendor’s solicitor will have limited access to the data room and will be only allowed to view information, as would the interested party.
How is due diligence beneficial to maintaining maximum value?
AD: Not only is due diligence imperative for buyers but sellers can also take advantage of the process in order to maximise value for their company. From the perspective of a buyer, a solid relationship with the vendor is paramount to the success of a company sale; a lack of communication or an element of mistrust can lead a buyer to lower the level of investment they are willing to put in and, in some instances, even completely call off the deal. Understandably, when parting with a large sum of money, the buyer will be keen to assess the situation fully to protect themselves from any undesirable consequences. With this in mind, vendors should ensure they prepare their documentation carefully, providing succinct and honest information at the earliest convenience.