Even though buy-side due diligence in the sale of a private company forms the bulk of the research during the deal process, sellers should not overlook important diligence steps that will help prepare their company for sale. Taking certain basic steps will help maximize the value of the business and increase the likelihood that the transaction closes successfully.

Several items, including record keeping, contract terms, financial reporting, and regulatory compliance standards, will signal to the buyer the relative risk of purchasing the company. A company with loose regulatory compliance practices or poor product documentation presents a greater litigation risk than a well-documented and tightly-controlled company. Accordingly, the buyer may discount the purchase price to offset the risk.

A seller can prepare for a private sale by reviewing key supplier and customer contracts. Three general best practices should be implemented in order to maximize the value of the company. First, the seller should strive to align contract terms with marketplace norms. In other words, if the industry standard is to extend net thirty payment terms with suppliers, any supplier contracts should include similar payment terms. Various terms should be aligned to market standards where practical, including pricing, service standards, termination rights, and other material terms.

In theory, a buyer would only be expected to care about the overall financial health and performance of the company for sale. However, buyers normally investigate the company’s contracts and do not like to see terms that are above or below market. Terms falling below market standards hint at preferential treatment and a risk of losing the customer or supplier relationship if there areattempts to make corrections after the deal closes. Above market terms suggest a different story:either the company has undue leverage in a distorted market, or the company is compensating for weaknesses in its products or services.

Notwithstanding the degree to which a seller’s contract terms are matched to market, a potential seller should attempt to standardize customer contracts, supplier contracts, and any other contracts susceptible to a standard form. This is the second best practice that should be followed. Ultimately, the seller’s goal should be to establish standard contracting practices and to maintain a set of formal approval processes that are published internally. The process should restrict which employee have signing authority. Standard terms and practices will facilitate a smooth due diligence process. It will also give a buyer confidence in its knowledge of the seller’s material contracts, regardless of the scope of the seller’s disclosure. In other words, the seller might lessen its own burden by disclosing a limited scope of contracts in place, saving time and money without causing the buyer any detriment.

As a final point, a seller should make efforts to align its best practices with those of the potential buyer. If there are multiple potential buyers, however, the seller should only adopt standard practices common to all buyers. Moreover, the seller should only do so when it will not harm the seller’s business. The underlying purpose of this alignment is to aid the buyer’s assessment and integration efforts, which makes the seller’s business comparatively more attractive.

For a consultation regarding your individual business issues, please contact San Diego Corporate Law today!