Key take aways

• Conduct an internal due diligence exercise prior to placing the business on the market.
• Identify and fix issues early with the advice of professional advisors.
• Maintain an appropriate document management system.

Internal due diligence

Once the decision is made to sell, one of the biggest challenges is simultaneously managing the sales process and maintaining your day to day operations. Planning ahead is key and being prepared will lessen the risk of a false start.

The main place to start is an internal check-up. Depending on the nature of the anticipated transaction, a purchaser can require an extensive due diligence process which can be arduous and disruptive to a business. To get ahead of this process, we advise clients to conduct their own internal due diligence process in advance of commencing a formal sale process. This can be done internally or with the assistance of external advisors and will help to identify and, if necessary, fix issues early. It also assists in ensuring the business has quick and easy access to all documents and records that a purchaser may request as part of their due diligence process, from accounts to IT systems. Legal due diligence will also form a large part of this process.

Depending on the type of business to be sold and the structure of the transaction, the internal legal due diligence process should focus on the following:

• reviewing material customer and supplier contracts to consider if a transaction would have any effect on those material arrangements, for example are there any clauses restricting the assignment of the contract or does a termination right arise on change of control of the business;
• reviewing employment matters generally, including ensuring employment agreements are in place for all employees and conducting a review or audit to confirm compliance with Modern Awards;
• ensuring all necessary licences, permits, and authorisation are valid and in force;
• ensuring corporate registers are accurate and up to date, such as register of members, register of directors including Director Identification Numbers;
• reviewing all policies and procedures to ensure they are up to date and follow best practice, for example data privacy and related policies; and
• confirming all registered and unregistered intellectual property is owned by the correct entities.

Take action to correct

If issues are identified during the internal due diligence process, it is important that a corrective action plan be put in place whether they relate to operational, financial or legal matters.

Where necessary, engage with your external advisors to ensure the appropriate corrective action is being taken in order to avoid further issues down the line. For example, with the increased use of third party contractors, it is imperative that appropriate contractual arrangements are in place to secure and assign the intellectual property rights from the third party contractor to the business otherwise you may find yourself selling a business with limited or no rights to the intellectual property created by non-employees.

Maintain good document management system

Regardless of whether an owner or company is intending to commence a sale process, it is imperative that a business has a strong document management system in place.

Good contract management not only aids the sale process, but improves general operations within a business. For example, the contract manager will be able to identify variations or changes made to a party with multiple contracts throughout their entire relationship. As a result, the business can act on the correct agreement to ensure that all obligations are met.

This is particularly important in a sale process as it will allow an owner or company to respond effectively and efficiently to a purchaser’s due diligence enquiries which builds trust and confidence and will ultimately increase the likelihood of a successful transaction.