Promises! Promises! (aka Warranties and Disclosure): The Benefits of Pre-sale Vendor Due Diligence

Sale of Business - Vendor Due Diligence

You run a very successful nursery and gift business but it is now time to sell. You have grown the small corner spot into an online store and have opened three new nurseries to meet the demand. You manage a team of 30 employees and you have incorporated a ‘mobile garden’ service into the business where you provide and maintain plants for businesses and corporate events. You know that your business is unique and the sale should attract a lot of attention.

You also remember the last business you sold and the time and money you wasted providing prospective purchasers with information they wanted. You provided the same information over and over to different purchasers (some of whom got cold feet), you lost track of who had received the information and ultimately you agreed to sell for less than the business was worth just to end the constant requests for information.

You do not want to play ‘round and round the garden’ again this time!

This is a common scenario for sellers who need to disclose certain aspects about their business and make warranties about the current operation and performance of the business. The provision of this information can sometimes end up in the hands of a business competitor without the sellers’ consent. Prospective purchasers should only receive confidential information about your business if under an obligation to keep that information confidential.

There is a way to avoid this. A ‘vendor due diligence report’ (DD report) gives the control back to the seller.

A DD report contains information regarding the business and is contained within the one document or one location, ie a ‘drop box file’ or a ‘data room’. This is most beneficial if the seller wishes to sell the business by tender or if the seller expects to have multiple inquiries regarding the business.

A DD report provides three main benefits:

The first is that you get ahead of any potential issues which may otherwise cause a purchaser to seek a reduction in the purchase price or insist on onerous terms. It allows you to manage those issues at the outset or at the very least prepare yourself for the consequences of them.

The second is that it allows you to control the due diligence process, which is commonly undertaken by a purchaser, and avoids much of the ‘round and round the garden’ for you when responding to inquiries that may occur where multiple prospective buyers are undertaking their own independent due diligence investigations.

And the third is that at the same time as supplying the DD report, you can require that the prospective purchaser enters into a ‘non-disclosure agreement’. This means that the prospective buyer will commit to not using the information for anything other than considering the proposed purchase.

The information about your unique nursery business is protected, you have a commitment from prospective purchasers not to share or misuse the information and you can concentrate on your business, rather than wasting time and money by providing separate and disconnected pieces of information to each interested purchaser.

Consider a DD report before you consider selling your own unique business.

To find out more and for advice on your business law situation, contact our Wodonga & Albury business Lawyers team at Harris Lieberman Solicitors.