Mergers and Acquisitions For Dummies (65 page)

Buyer can conduct due diligence from the comfort of his cold and impersonal office instead of traveling to Seller's facility and sitting in her cold and impersonal office.

Multiple people from Buyer's side can access the data room.
Seller only needs to grant them access (user name and password).

The online data room acts as a central depository.
This function cuts down on multiple people from Buyer's team making the same request over and over.

Seller can monitor who from Buyer's team has accessed the online data room and which documents those people have reviewed.
This helps Seller gauge Buyer's seriousness. Is he looking at all the information or just certain bits — say, the customer list?

Seller gets a level of security.
Documents loaded to most online data rooms have a watermark displaying the name of the user, the date of access, and the IP address. If Buyer breaches confidentiality and gives the due diligence materials to someone not approved by Seller, the documents clearly point out the person responsible for the breach.

Business as usual: Running the company during due diligence

Seller should continue to run the business as if she weren't in the process of selling it. The company should buy supplies, pay bills, and make sales calls as before.

However, if Seller is thinking about making big business decisions, such as substantially increasing overhead or hiring new salespeople or executives, she should probably confer with Buyer first because huge changes to the business may affect the company, notably the profits.

Selling a business is a highly sensitive process, and Sellers need to tell their employees of the sale (or pending sale) at the right time. Furthermore, Sellers need to control that right time. Unless an employee needs to know (usually executives and certain financial personnel need to know), Seller should wait until the deal is closed before making an announcement to the employees.

Keeping the cards close to one's vest is important for a couple of reasons. If Seller informs the employees of a potential sale that ends up falling through, Seller loses face. Worse, employees may start to wonder why the deal didn't close. They may assume that the company is facing some sort of problem and start a mass exodus. Additionally, employees who hear about the pending deal may assume they'll get fired after the deal closes and begin to jump ship as they look for new jobs.

If the news of a pending sale is released prematurely, the company may suffer major losses. For this reason, Sellers shouldn't give Buyers carte blanche to contact Seller's employees at will. Buyer shouldn't call or contact any of Seller's employees without Seller's explicit approval. Seller needs to carefully control this release of information and the timing of when Buyer speaks with employees.

As Seller, if someone on Buyer's team has caused a breach by making unapproved contact with one of your employees, immediately pick up the phone and call the other side. Don't rely on e-mail. You need to have a conversation. Remind Buyer he's not to make contact without your approval and ask him to adhere to protocol and the terms of the confidentiality agreement (see Chapter 7). Most Buyers immediately understand the gravity of the situation and take steps to fix the problem. In other words, someone on that team is about to get an earful!

After making such a phone call, send an e-mail memorializing your conversation and ask the other side to confirm receipt and understanding of the e-mail. This way, if the problem occurs again, you have a written record of the first breach.

Providing Appropriate Information

The expanse of due diligence information is far deeper and wider than the information that the offering document, or deal book, provides. The offering document (see Chapter 8) provides enough information for a Buyer to make an offer. Due diligence provides enough information for that Buyer to be able to close the deal. Another difference is that the offering document is intended for laypeople. It's relatively easy to read and comprehend, and its focus is high level; that is, it contains fewer nitty-gritty details. The due diligence material is for experts and can be mind-numbingly boring!

Please review the appendix for a very, very detailed listing of due diligence items. The due diligence items I list in the following sections are only a recap of typical due diligence items and are intended to give both Buyer and Seller an idea of the depth of materials needed to conduct due diligence.

Corporate info

Buyers want to pay close attention to a bevy of legal paperwork to make sure Seller actually has the legal right to sell the business to Buyer. Not having the legal right to sell something poses a wee bit of a problem in selling a business!

Here are some of the items Sellers should provide for the review of corporate information:

The company's articles of incorporation, bylaws, and minutes from board meetings

Annual reports

Names and contact info of shareholders and number of shares held by each