What do you know about software companies
A due diligence is an essential phase in the sale of a company or the sale of business shares. After the field of interested buyers has intensified and few potential buyers have signaled their serious interest in buying, the interested parties are given a time-limited opportunity to deal with very detailed information about the property. The prerequisite for this is the conclusion of a declaration of intent in the form of a Letter of Intent (LOI) and of course a declaration of confidentiality, which is usually already available by this point in time.
Which data and information are relevant?
The due diligence phase gives the potential buyer the opportunity to conduct a structured risk assessment. The seller has to provide documents and information on commercial, legal, organizational and technical aspects.
In practice, it is advisable not to compile information "randomly", but to collect the specific requirements for this phase from the buyer yourself or, better, via your M&A advisor, before setting up a so-called data room (now usually on an electronic basis). In addition to the compulsory parts, such as insight into financial and tax law aspects, experience has shown that investors want different perspectives and that are decisive.
While traditional financial investors usually focus on numbers and, above all, the development of sales, costs and income, strategic investors take a different perspective on the project. The primary driver here can be the acquisition of key technologies or a staff or customer base. In the sale of hardware and software companies, for example, a code review usually takes place as part of technical due diligence. Interested buyers and investors then also want to see what the level of documentation of development statuses looks like, since the asset usually - in addition to existing customers and employees - lies primarily in the technology itself. This is why it is so crucial to coordinate with the potential buyer in advance which information is necessary for a well-founded risk assessment.
Structure and professional moderation create an overview
If several interested parties examine the project at the same time, separate, electronic data rooms should definitely be provided for reasons of confidentiality. Basically, the seller has the right to know who has access to the sometimes very sensitive data from the purchaser. In addition to acting persons from the purchaser, external consultants from the purchaser also have access. The M&A advisor can also provide useful support here in order to obtain a complete list of contact persons with functions in advance and to professionally moderate the due diligence process across the entire route among all those involved. As part of the examination, a large number of detailed questions are usually raised, where it makes sense that these are recorded precisely and answered quickly.
It is not uncommon for an intensive dialogue between the seller and his advisors, including tax advisors, lawyers and auditors, to take place in this phase. At this point it should be mentioned that all of the named people just Are advisors to the seller and also have to be well controlled, as these too primarily only look at the project from their content-related perspective.
Since a due diligence (DD) can stretch over a period of a few days up to several weeks or even months, the operative business of the selling entrepreneur will of course continue during this time. Therefore, during this phase, the seller is usually asked to actively inform potential buyers as part of the DD about changes that go beyond normal business operations. There is usually a duty to inform about changes in the workforce - this applies to both additions and departures - as well as changes on the customer side, here the terminations of key customers are of particular interest. In addition, you should also be informed if relationships with business partners change or tax reviews and findings result in changes in the commercial documents.
All the results and findings of this important phase will later flow into the final assessment of the purchase price, which will hopefully be confirmed from the seller's point of view in the amount discussed in advance and the payment modalities. On the other hand, they have an influence on agreed warranty and guarantee claims of the buyer, which will later be found in the sales contract.
Behavior with critical questions
The more detailed the examination is carried out by the interested party, the more special questions can arise. In addition, situations and facts can arise in the context of the DD that a seller does not even know (should be the exception) or is no longer consciously on the screen.
Here, too, it helps to discuss these potentially critical issues with an M&A advisor in advance in order to consider how they should be communicated to an acquirer or whether they need to be communicated at all. A critical issue that must be communicated in any case could be, for example, that there are customers with whom the provider is currently in legal dispute or employees who have indicated that they want to leave the company.
Because due diligence is carried out in every transaction, the seller can prepare for it in good time. He is well advised to check his documents and data for completeness, prepare them and, in this context, digitize them in parallel to addressing potential buyers to the market, if some are still in paper files. This ensures that the duration of the transaction process is not artificially prolonged. Missing annual financial statements, balance sheets or contracts could easily extend the process by 2-3 months.
In summary, it can be said that due diligence should confirm the strengths of a company and point out possible weaknesses. If this crucial phase has been successfully mastered with all parties involved, then the way for a successful transaction is usually paved.
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