You have found an investor who is interested in buying your company and signed a Term Sheet and NDA (see M&A Basics: Do you want to sell your company? Part 1 - Term Sheet and NDA). What happens next?

Whoever is interested in buying your company, you can be sure that the acquisition itself will be preceded by a thorough financial and legal due diligence. As part of this, the investor will examine every detail of your business in an effort to protect against hidden risks that could derail his or her investment.

Legal due diligence of smaller and medium-sized companies very often reveals similar problems. Examples of regular "disclosures" include:

  1. irregularities in past transfers of shares, e.g. missing spousal consents;
  2. missing contracts with members of statutory bodies; or contracts that should not govern the relationship between the statutory body and the company;
  3. contracts between related parties without adequate consideration;
  4. contracts with sole traders instead of employment contracts and deficiencies in employment contracts;
  5. unresolved intellectual property rights (e.g. copyrights, software rights, licences) and infringement of third party copyrights;
  6. deficiencies in the processing of personal data and related documentation;
  7. inadequate provisions in commercial contracts;
  8. risks associated with the ownership of immovable and movable property (e.g. disputable titles, lack of authorisations), etc.

Of course, each sector has its own specific characteristics. For IT companies in particular, intellectual property can be a problem. For manufacturing firms, real estate titles or environmental burdens may be a problem.

The nature and extent of the problem that an investor identifies in a company during due diligence can have a decisive impact on whether and how the transaction proceeds. Based on the results of the due diligence, the investor may decide to abandon the transaction, demand a reduction in the purchase price, or insist on indemnification in the event that any of the risks materialize.

However, it is also possible to prepare for the sale in advance. This is done by conducting an internal audit yourself before you let an investor into your own kitchen. While this may involve costs that you don't expect in the normal course of business, on the other hand, such an audit will help you set up your processes correctly, reduce the risks of unexpected losses and, most importantly, be ready when the investor shows up.