Seller’s checklist – how to prepare for due diligence

Mike Ashley, the owner of Newcastle United, has recently confirmed his plan to sell the club. His lawyer has stated that a sale before Christmas is the intention and that the due diligence process should be conducted in this time. It remains to be seen as to whether such a fast sale can be achieved. What due diligence will the buyer of Newcastle United perform and how can Mike Ashley (or any business owner) prepare for this?

What is due diligence?

Once a deal for a sale is agreed, a sensible buyer will usually conduct a “due diligence” exercise. Essentially, this is the process of gathering information about the target business and discovering any potential liabilities which could have an impact on the purchase price or, in the worst case, be a deal-breaker. During due diligence, a buyer will ask various questions to which the seller must respond and provide copies of the information and documentation requested. The exercise will have a large impact on how the sale documents are negotiated and framed.

The scope and extent of due diligence which will be carried out by a buyer (e.g. legal, financial, business, employees and customers) will depend on various factors, including the size of the deal and the buyer’s specific requirements.

Seller’s checklist – how to prepare for due diligence

In terms of legal due diligence, the buyer will be investigating the legal risk of the deal. A checklist for Mike Ashley (or any seller) to consider, designed to ensure the sale runs as smoothly and efficiently as possible is set out below:

Company structure and documents

• Ensure all statutory registers and records are up to date and available
• Ensure that your business is up to date with its tax affairs and its legal structure is transparent and the documents accurately reflect this
• Ensure the shareholding position is clear and documented

A buyer will want to ensure the shares are in the control of the seller and all share transactions have been carried out correctly. They will also need to understand whether any third party consents and/or clearances are required for the deal.

Employment and management team

• Demonstrate how staff are engaged and classified, their roles are clearly defined and properly documented

A director’s role can be documented in a separate director’s service agreement. Often a buyer or external investor will also be interested in the management team you have on board and need confidence in them and their skills. They will also want to see all the business policies including health and safety.

Intellectual Property (IP)

• Provide proof that your trademarks, company name, domain name and other forms of intellectual property are properly protected

You should ensure that your IP is registered and held by the company so that the business benefits from the value of those rights. If IP is not registered or does not rest with your company then this could lead to significant problems.

Business contracts

• Provide for inspection all business contracts to be disclosed

All key contracts need to be in place, signed and up-to-date including key supply agreements, key sponsorship agreements property leases, to name a few.

A data room is usually recommended and useful tool. All documents can be stored in one location and easily accessed and organised. Any issues with the documents can usually be identified at an early stage.

Dispute resolution

• Where possible resolve any disputes

A seller will investigate any disputes which the business has been involved in – ideally disputes should therefore be resolved before entering into negotiations.

Other enquiries made can include a review of tax, business accounts, finance, assets and property owned, environmental, information systems and regulatory compliance.

When considering a business sale preparation is key to prevent any risks and problems during due diligence, as this will shape your deal. Best practice is to organise yourself from the outset, ensuring you are prepared and legally compliant. When it comes to selling this will ensure the process runs smoothly and should increase your prospects of a successful sale.

If you require advice on this matter or any corporate or commercial law issues please contact Sej Lamba on 020 7288 5756 or by email at SehajLamba@boltburdon.co.uk.

You can also contact one of our other solicitors in the Corporate and Commercial team here.