Due Diligence

Due-Diligence: The Offer to Purchase should contain a ‘subject to due-diligence’ clause. Up until now, both buyer and seller will have relied on the representations of the other, and now the agreement of the parties to conclude a purchase and sale of the company between them is set-out in the Offer to Purchase based on that same reliance. The subject clause is to provide both parties opportunity to confirm that reliance, and if not, provide opportunity to withdraw.

The Offer to Purchase should contain a ‘subject to diligence’ clause written to the benefit to the buyer, and a ‘subject to diligence’ clause written to the benefit to the seller, whereby both parties will be granted access to books, records, materials, contacts and/or other information each may reasonably request in order to satisfy both parties that they are indeed in possession of the relevant facts on which the Offer to Purchase has been made and accepted. If either should find otherwise, the buyer must be able to withdraw the offer, and/or the seller must be able to withdraw acceptance of the offer, without penalty.

The diligence period and diligence process should be defined and scheduled in the Offer to Purchase. The ‘subject to diligence clauses should contain an expiration date, after which, if not first satisfied and removed by the beneficial party, the offer or acceptance may be withdrawn by the other party without penalty. Similarly, the ‘subject to diligence’ clauses should contain scheduling with respect the more sensitive diligence areas, such as diligence pertaining to customers or employees perhaps. Such diligence should be scheduled to the end of the diligence process, after all less sensitive diligence has been completed and those subjects removed.

In order to maintain confidentiality to the greatest extent possible throughout the process, until this time the buyer will have not had diligence-level access to all that may be necessary to the satisfy the buyer, who will have instead relied on the information contained in the confidential business profiles and on other information learned through questions and answers, discussions, tour(s) of the business, etc., and the Offer to Purchase will have been submitted based on that reliance. Similarly, the seller will have based acceptance of that Offer to Purchase on the representations of the buyer.

This will have enabled buyer and seller to reach a business-like agreement on key issues, such as price and terms, vendor take back, payment and security (if any), what is to be included in and what is to be excluded from the sale, adjustment formula, completion, closing and transition schedules, non-compete agreements, etc., all without prematurely exposing the business and perhaps the employees to the interruption and the curiosity and uncertainty of the full diligence process.

But once the Offer to Purchase will have been made ‘subject to diligence’ and accepted ‘subject to diligence’ it will be time to prove these representations by opening the books and records and other points of relative information to the scrutiny of the buyer and/or buyer’s agents. However, that in not meant to suggest unscheduled or uncontrolled access. The seller will still have a business to run and concerns about confidentiality and concerns with respect to employees, customers, and others. Thus, while the diligence process must be satisfactory to the buyer, it must also be safe for the seller in the event that for some reason the sale should fail to close.

The buyer’s subject clause in the Offer to Purchase should provide that if not proven to the satisfaction of the buyer during such diligence, then the Offer to Purchase may be withdrawn by the buyer without penalty. Thus, it will be highly important that the pre-due diligence work conducted by or for seller during calculation of the valuation and the preparation of the business profiles be thorough and factual and confirm-able. Big surprises or too many surprises during diligence will generally be fatal to the deal.

Similarly, seller must be granted access to such information that will satisfy seller that the buyer is capable and dependable, and the seller’s subject clause in the Offer to Purchase should provide that if not proven to the satisfaction of the seller during such diligence, then seller’s acceptance of the Offer to Purchase may be withdrawn by the seller without penalty.

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