Sell-Side Due Diligence Checklist

Start about 16 weeks before the target date the data room opens to bidders. The first task names the company, that date and the five people, and asks where the business is and how it is likely to be sold. Every due date counts from the data room date, in working days.

• Set up the sale preparation — the company, the project name, the target date the data room opens to bidders (which every due date counts from), where the business is and how it is likely to be sold, the advisers, and the five people; later tasks are assigned from these fields
• Agree the sale objectives with the shareholders — what the shareholders want from the sale (all or part of the company, timing, who stays on after it), the buyers likely to be interested, any terms that would end the sale, and who decides for the shareholders
• Appoint the lead adviser and the seller’s lawyers — the engagement terms and fees, the kind of process (a negotiated sale with one party or an auction between several), and what the adviser, the lawyers and the company team each do
• Set the timetable and the confidential deal team — the code name, the few people inside the company who know about the sale and why, the time each can give alongside the day job, and the key dates from now to the data room opening
• Decide whether to commission vendor due diligence — whether the seller pays an independent firm for a report on the business that bidders can read (financial, tax, legal or commercial), its scope, the provider, the cost, and how bidders may use it

Buyers start with the numbers. Get the accounts, the management accounts and the forecast to agree with each other, and explain every adjustment before a bidder has to ask.

• Gather the accounts and management accounts for the last three years — the filed or audited accounts, the monthly management accounts, the trial balances by company, and the current year to date, in one place and in the form bidders will see
• Brief the vendor due diligence provider — the agreed scope, the periods, access to the finance team and the documents, the timetable to a draft before the data room opens, and the terms on which bidders and the winning buyer may see and rely on the report
• Reconcile the management accounts to the statutory accounts — each year’s management accounts against the filed or audited accounts, the differences explained (year-end adjustments, accruals, stock, revenue timing), and the bridge kept for the data room
• Normalise the earnings and test the adjustments — one-off and non-recurring items, owner costs that will stop after the sale, and other adjustments to profit (such as adjusted EBITDA), each with evidence a bidder can check, and a sell-side quality of earnings review where the seller wants one
• Review working capital and its seasonal pattern — monthly debtors, stock, creditors and accruals for at least the last 24 months, the normal level and why it moves through the year, ready for the discussion of the level the price assumes
• List the debt and debt-like items — loans, overdrafts, leases, unpaid tax, deferred income, deferred consideration on past purchases, unpaid bonuses, provisions and anything else a bidder may treat as debt and take off the price
• Prepare the forecast and the assumptions behind it — the budget and forecast for this year and the next, the assumptions behind each line, the trading so far against the budget, and the pipeline that supports it

A buyer’s lawyers will read the company’s own records first. Make sure the company owns what it says it owns, has filed what it should, and knows which approvals and consents the sale may need.

• Review tax compliance and open matters — returns filed and taxes paid for each tax, open enquiries or audits, reliefs and credits claimed and their evidence, payroll taxes and sales taxes or VAT, and any exposure to put right or disclose
• Check the statutory books and public filings — the registers of shareholders and directors and of people with significant control or beneficial owners, every share issue and transfer, and the filings at the company registry, against each other
• Confirm who owns the shares and what the sale needs from them — the shareholders and their holdings, options, warrants and convertible instruments and what happens to each on a sale, the shareholder agreement and articles (consents, pre-emption, drag and tag rights), and anyone whose signature the sale will need
• Put right gaps in the corporate records — missing board minutes and shareholder resolutions, late or missing filings, share issues or transfers without the right paperwork, and the steps and advice each fix needs
• Review disputes, claims and regulatory matters — litigation and threatened claims, complaints, regulator correspondence and inspections, licences and permits the business depends on, and what each would mean for a buyer
• Identify the approvals and consents the sale may need — government approvals (merger control and investment screening), regulator approvals for a change of control of a regulated business, landlord, lender and customer consents, and how long each may take

These are areas where a buyer’s review can find issues that change the price: a customer that can walk away on a sale, IP the company does not own, people the business depends on, and systems or data that are not secure.

• Review the key customer and supplier contracts — the largest customers and suppliers, change of control and assignment clauses, exclusivity, termination rights, unusual liabilities, and contracts that are unsigned, expired or running on old terms
• Check the company owns and protects its IP — registered rights and their renewal dates, assignments from founders, employees and contractors who created the products, software licences in and out, open-source use, and domain names held by the company
• Gather the people information — an anonymised list of employees with roles, pay and benefits, the standard contracts and policies, contractors and how they are engaged, bonus, commission and share schemes, pensions, and open disputes
• Plan how to keep the key people through the sale — who the business depends on, who is told about the sale and when, retention or transaction bonuses and who pays them, and the roles the founders and managers will have after the sale
• Plan the TUPE steps for the asset sale — the employees assigned to the business being sold, the employee liability information for the buyer, informing and consulting the employees’ representatives, and where the steps will be run
• Review IT, data protection and cyber security — the main systems and who owns the licences, security incidents and how they were handled, the privacy notices and records of processing, data breaches reported, and the policies a buyer will ask to see
• Review property, insurance and key assets — leases and their break dates and consents on a sale, owned property, the insurance policies and the claims history, and the equipment and other assets the business needs

Every issue the clean-up found goes on one log and gets one decision: fix it before launch, disclose it, or explain it in the price or the terms. Raising an issue first lets the seller explain it on its own terms.

• Log every red flag and decide how to deal with it — each issue from Phases 2 to 4, its area, what it could cost, and the decision: fix before launch, disclose, or explain in the price or the terms, with an owner
• Fix the issues that can be fixed before launch — the record fixes, missing IP assignments, unsigned contracts, filings and policy gaps that can be put right in time, each checked and its evidence filed for the data room
• Draft the early disclosures for issues that stay — a short, factual note on each issue that will not be fixed, with the documents behind it, ready for the data room and later for the disclosure letter or schedules
• Check the draft vendor due diligence report for accuracy — the draft read by the finance team for factual accuracy, errors corrected with evidence, the findings matched to the red flag log, and the final report date agreed

Build the data room around the questions buyers will ask, decide who sees what and when, and make sure the presentation, the data room and any vendor report tell the same story with the same numbers.

• Set up the data room structure and index — a numbered folder for each area a buyer reviews (corporate, finance, tax, contracts, IP, people, IT, property, disputes), a naming rule, the provider and its settings, and one index that will become the record of what was disclosed
• Set the rules for access and for personal data — a signed non-disclosure agreement before any access, staged access (what every bidder sees and what only the preferred bidder sees), view-only and watermark settings, personal data anonymised wherever possible, and how competitively sensitive information is handled if a bidder is a competitor
• Send the information memorandum and collect the signed NDAs — the teaser and information memorandum the lead adviser sends to the buyer list, a non-disclosure agreement signed by each bidder before it receives the memorandum or data room access, and the shortlist of bidders who will get access when the data room opens
• Agree how bidders may see and rely on the vendor report — the release terms bidders sign before reading the report, the reliance the winning buyer (and its lenders) will get, and the provider’s limits on liability, as agreed with the provider
• Upload the documents and check them against the index — every document final, signed, complete and readable, in the right folder under the index number, with nothing uploaded that is not meant for bidders
• Prepare the management presentation — the business, its markets and customers, the team, the financial history and the forecast, and the plan, using the same numbers as the data room and any vendor report
• Check the numbers agree across every document — revenue, profit, adjustments, headcount and forecast figures the same in the information memorandum, the presentation, the data room and any vendor report, or each difference explained

Rehearse the presentation, sum up what is ready and what is not, and let the sale approver decide whether to open the data room. The checklist halts at that decision.

• Rehearse the presentation and the questions buyers will ask — a full run-through with the adviser, the hard questions on each red flag and adjustment, who answers what, and the answers checked against the data room
• Write the readiness summary for the sale approver — what is ready, the red flags and how each is dealt with, the gaps still open, the state of any vendor report, and the adviser’s view on whether to launch on the date set
• Fix the readiness gaps and set a new data room date — each gap the approver named, its owner and the date it is fixed, then a new data room date on the first task, and the launch decision taken again
• Record the decision and pause the sale preparation — the reasons, who was told (advisers, the deal team), the work kept for a later sale, the data room left closed, and the confidentiality that continues
• Sale approver decides whether to open the data room to bidders — the approver reads the readiness summary and decides Go, Not yet, or Do not go ahead with a sale now; complete this task with the decision, and nothing after it can be completed until it is done

Applies only when the launch decision is Go, or has not been made yet. Open the data room to bidders who have signed, give the management presentations, and answer every question once, in writing, through one channel.

• Open the data room to the bidders who have signed — access only for bidders with a signed non-disclosure agreement, at the stage the access rules set, with the bidders’ deadlines and the rules for questions sent with the access
• Give the management presentations — one session for each bidder, the same core material for all, the questions asked recorded, and the follow-up answers sent through the question process
• Answer bidders’ questions through one process — each question logged, routed to the person who knows, answered in writing, checked by the legal lead where it touches a warranty, and the answer added to the data room where every bidder should see it
• Open the last stage of the data room to the preferred bidder — the documents held back for the last stage (named employee data, customer prices, sensitive contracts), under the confidentiality terms and any clean team arrangements the access rules set
• Keep the record of what each bidder has seen — the data room’s access reports, the documents added after it opened and when, and the question log, kept so the disclosures can point to what the buyer actually received

Applies only when the launch decision is Go, or has not been made yet. Check the warranties, disclose against them, settle the insurance position, keep a dated copy of the data room, and hand the open items to the completion plan.

• Review the warranties and indemnities in the draft purchase agreement — each warranty against what the clean-up found, the limits on the seller’s liability (caps, time limits, thresholds), the specific indemnities the buyer asks for, and which warranties need a disclosure
• Prepare the disclosure letter or disclosure schedules — a specific disclosure against each warranty it qualifies, each one fair and with enough detail to identify the matter, the documents it refers to, and any general disclosures the buyer agrees
• Agree how far the data room counts as disclosed — whether the buyer accepts the data room and the question log as generally disclosed, the index that defines it, and the copy that will be kept
• Settle the warranty insurance position — whether the buyer is taking warranty and indemnity insurance (UK term) or representations and warranties insurance (US term), the seller’s answers to the insurer’s questions, and the seller’s own liability cap that results
• Archive a dated copy of the data room as disclosed — a complete, dated copy of the data room, its index and the question log at signing, given to both sides’ lawyers and kept for as long as claims under the agreement can be made
• Hand the open items to the completion plan — the conditions to completion, consents and approvals still to come, the TUPE or employee steps, the completion documents, and the post-sale undertakings the seller gives
• Close access for the other bidders and confirm their data is returned or destroyed — access removed for every bidder that is not the buyer, the return or destruction their non-disclosure agreements require confirmed in writing, and the record kept