A US judge recently ruled that RBS and Nomura made false statements when they sold mortgage-backed securities to Fannie Mae and Freddie Mac Nomura in the run up to the 2008 financial crisis.
A further hearing is due to take place as I write and it is anticipated that RBS will be ordered to pay damages amounting to almost half-a-billion dollars as a result of an “enormous” mortgage deception; underwriting around $2bn in mortgage-backed securities, making false statements and wholly disregarding its due diligence process.
It’s a salutary and headline making story about the failure (or worse) to conduct appropriate due diligence.
Regardless of the size or reason for a sale, a detailed due diligence check is crucial to evaluate any corporate transaction, particularly when involved in a share purchase where you’re selling or buying a corporate entity, warts and all.
Areas for consideration include legal and tax implications, existing employees, current debts, accuracy of historical performance and projected forecast. Due diligence can be a complex, stressful and deal breaking process so here are some pointers about the key issues to be addressed.
Heads Of Terms For Selling Your Business
Once you have reached an agreement in principle, formally particularise what you have agreed in a Heads of Terms document. Whilst it is not a legally binding document, it enables your legal and financial advisors to fully understand the parameters of your agreement and begin the drafting/transactional process. It also avoids later misunderstanding between parties about exactly what was (or wasn’t agreed) for selling your business.
When and how to disclose confidential information is a key balancing act in any deal. The buyer always wants as much as possible, as soon as possible. Often, before a deal has been agreed, it is unnecessary for buyers to know particularly sensitive information but once DD has started, they will need and expect to get under the bonnet of the business.
As it’s highly likely that sensitive information will be disclosed, it is imperative to negotiate a legally binding confidentiality agreement to protect you if the sale does not go ahead.
The timing of confidentiality can be a bit cloak and dagger and this is often where a highly skilled advisor really earns their corn, in negotiating parties through this part of the process. It’s the time in a deal when you’ll be grateful you chose your advisor with care!
Seller Due Diligence
You will inevitably speed up the sale process and save significant costs if you control the flow of information by collating and disclosing your own due diligence materials. This may include detail on your corporate and shareholding structure, statutory/management accounts, tax returns, details of any litigious disputes, current HMRC/regulatory enquiries, business contracts and employee terms and conditions.
Seller due diligence is additionally advantageous if there are multiple potential purchasers and you want to prepare in advance standard pack of information to elicit a number of firm bids the business.
It’s also highly beneficial to have lined this information up in advance of getting a deal. Time kills deals and if you spend weeks, months collecting pieces of information whilst a buyer is kicking his heels, you could lose the deal all together.
Preparation in M&A is crucial to complete deals. Get your ducks in a row early.
Sellers will be expected to give a number contractual promises by way of warranties. Disclosure against warranties is designed to protect the seller from proceedings brought under the share purchase agreement for breach of contract after the business been sold. Therefore it is crucial to pay specific attention to warranties to ensure that full and accurate disclosures are made.
This is vital that you structure the sale of your company or business in the most tax efficient manner. Entrepreneurs’ Relief, dividends and possible share transfers to a spouse are further areas to consider and again, good preparation is crucial in this area.
Get your team of advisors on board early in the process of selling your business and make sure they know what they’re doing – too many professionals say they’re experts in M&A but it’s crucial to your future wealth that they genuinely are.
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