David Young is a Partner at DLA Piper (http://www.dlapiper.com/). In this video he discusses due diligence and schedules when selling your business.
- A non-disclosure agreement (NDA) is the central document
- Manage due diligence communication carefully
- Disclosure schedules are written representation of due diligence
- All legal aspects must be mentioned in the disclosure schedules
So when people are preparing to sell a company, one area that always ends up or generally ends up being a whole lot more work than they think is the whole concept of due diligence where a buyer who is buying a company goes very, very detailed in level of due diligence that they do on the target company that they’re buying much more so than any investor would or other strategic partners to a company because they’re going live and breather with every contract, everything.
So generally, the first document that sort of governs the due diligence review is a non-disclosure agreement. It’s very important for the seller to have that in place which is basically just requiring the buyer to keep the information confidential. But then in the process, they’ll basically ask for all legal documents, all business contracts, basically, almost every piece of paper that the company has.
And also, we’ll often want to talk to vendors, talk to suppliers, talk to customers and those are conversations and part of due diligence you want to manage carefully as to when that happens in the process usually you want to sort of not let people talk to your customers until late in the process. We really know it’s going to be a deal. Maybe you always want to be in those conversations. It’s really important to sort of really think that through not kind of blindly agree to do everything the buyer ask but really think about when and how much and what your (comfort) with at different points in time in the process.
And disclosure schedules are sort of the translations of that due diligence into the documents where you give very detailed representations, some warranties, generally from 10 to 30 pages of text, and what backs us up are disclosure schedules listing all litigation or claims, listing all contracts, listing all benefit plans – basically everything the company has is listed out there.
Again, those are almost the insurance policy for the seller. Everything listed on there, the buyer is deemed to know about. If it’s not listed on there, even if you told him everyday for a month, it’s not – when it comes to sort of legal aspects of the deal, they won’t be deemed to know about it.
So sort of spending time on the disclosure schedules is always time that’s well spent. And being ready and prepared with due diligence process getting organized early is really important in selling a company and will pay benefits during the process and to get to a successful deal.