Groundwork for an M&A exit – Due Diligence Topics

Selling the company involves a lot of time and effort for management, but there are a few things you can do to get ready for a sale to improve the speed and reduce somewhat the pain of the process.

Below are tips on specific diligence subjects that often take up a lot of time and expense, and which can impact deal value.

• Contracts – gather your important contracts (and all of the amendments, statements of work, appendices, etc.). This can take time, especially if you need to get them from parts of the organization that may not know the company is for sale.
• Employee NDAs (the ones with the confidentiality and assignment of inventions provisions)– if you don’t already, get all of these together, even for past employees. If your company relies at all on IP, trade secrets, etc., the company will be required to represent that all the company’s employees (past and present) have signed one (or at least, the ones involved in the creation of IP used in the business), and you can avoid a lot of uncertainty if you have all of these in hand.
• Stock records and Cap table–
  • This blog has repeatedly emphasized the importance of record keeping, and if your company exit is an equity deal (merger, stock purchase, or the rarer "interest exchange"), the buyer will carefully review your capitalization to make sure the right people are getting paid in the deal. Preparing to sell the company is a lousy time to find out someone never signed the stockholders’ agreement and isn’t subject to the drag-along or that your stock ledger doesn’t match up to your cap table.
  • Gather all the board and compensation committee resolutions authorizing equity issuances. For your major equity financings, these are usually in the closing books, but other one-off issuances will not be.  Get all of your incentive plan award documents together.
  • Try to coordinate the information in your cap table with the related records. If you have a decent number of shareholders, your buyer may use a bank as a paying agent to distribute merger consideration, and the paying agent will expect you to deliver a fully functioning file listing everyone who is supposed to get paid, all of which needs to tie back to your stock records (including details like names, etc.). If XYZ Fund has invested in your company through three different LPs, make sure that is clear in all of your cap table and waterfall documents.
  • Ideally, build your cap table as you go in a way that matches up to your stock ledger to reduce inconsistencies and the need for reconciliation (which can take a lot of time and legal cost). The financial audit process will sometimes catch inconsistencies in terms of aggregate share numbers, but won’t highlight inconsistencies relevant to directing the deal consideration to the right people.