Few boards of directors will ever subject their business to the level of scrutiny that will be applied by a prospective purchaser or investor.
While some trade buyers or angel investors may be able to form a relatively quick commercial view on problematic issues that are disclosed, other kinds of buyer or investor may feel duty bound to exhaustively assess every aspect of the business. As deal sizes increase, so do the risks and the resources that are applied in assessing those risks.
Owners and managers are likely to have formed a subjective view of the overall risks associated with the business, based on their experience, historical knowledge, market awareness and personal relationships.
A diligence exercise is designed to identify any and all risks and initially, investors and buyers may only be able to form an objective view, based on a worst case scenario. Even if their concerns are not overwhelming, an investor or buyer may seek to use such a view point to their best commercial advantage. If their concerns cannot be quickly allayed, the consequences for a business and its owners can be delay, price reduction or ultimately a failure to conclude a deal.
Phrases such as “investor readiness” and “exit readiness” are now well understood, which has lead to even very early stage companies organising themselves in a way which allows details of their corporate records, assets and trading to be made readily available to an interested party (under appropriate confidentiality arrangements of course). Advances in technology have made this much more achievable and as lawyers, we are increasingly impressed with what some companies achieve with relatively little professional guidance.
In many instances such preparation pays great dividends but the best record keeping in the world may not be able to allay the concerns of an objective third party or their expert professional advisers, who are being paid to be paranoid.
For that reason, as part of the preparations for any large fundraising or exit, the owners and managers may need to engage a new mode of thinking, so that they can identify and neutralise the transaction risks that might cost them time or money when it comes to the closing stages.
There is of course no exhaustive list of what might be relevant or what might be claimed to be relevant. Perhaps it is some vexatious litigation in a foreign jurisdiction, the expensive but non-urgent building repair that has been put off for years, the software engineer that failed to sign his contract but created real value or the disgruntled shareholder who has made allegations that never merited a response.
Whatever the subjective view of the directors when it comes to such issues, any proactive steps that can be taken to identify and neutralise them will increase the chances of a successful outcome for the sellers.
We are regularly asked to help resolve such issues and the optimal outcome is more likely to be achieved the earlier any issue can be tackled. If the above highlights any issues that merit further discussion, please don’t hesitate to get in touch with your regular contact at MBM Commercial.
For further information, please contact Kenny Mumford on 0131 226 8205