Chapter 9: Due diligence from the seller’s side

Due diligence is the buyer’s thorough review of the business before the purchase agreement is signed. Its purpose is to confirm that the business is what you have presented it as, and to uncover risks that need to be dealt with in the price or the agreement. For you as the seller, due diligence is a demanding phase: you have to provide a lot of information in a short time while the business continues to run as normal.

Types of due diligence

The scope depends on the size and complexity of the business. When buying a small webshop, due diligence can be done in a few days by reviewing the figures and access, whereas buying a manufacturing business with employees can take several weeks with an accountant and a lawyer.

Build the data room

The data room is a structured collection of all relevant documents to which the buyer is given access. On Sitavo, you upload the documents to the listing’s data room, and only buyers with an approved NDA, an accepted offer or a deal can open them. Use Sitavo’s General DD template as a checklist so the buyer can find their way around.

1. Put the documents in the data room’s folders — financials, traffic and marketing, technical, legal, operations and suppliers, customers and other — so they follow the areas of the checklist.
2. Name files consistently, e.g. “3.2 Lease Hovedgaden 2019.pdf”.
3. Make a table of contents so the buyer can see what is there and what is missing.
4. Anonymise sensitive information (customer names, CPR numbers, salaries by name) until it becomes necessary to show it.
5. Review each document before uploading it — is it up to date, complete and signed?
6. Keep a log of what has been uploaded and when. In Sitavo’s data room you can also see which documents each buyer has opened or downloaded.

What the buyer sees in Sitavo’s data room

• Watermarked files: PDFs and images the buyer downloads get a watermark with the buyer’s name, email and date.
• Ask the data room: Buyers with access can have AI summarise the documents and ask questions, which are answered with a reference to the document and page. You can see the summaries and correct a document if something has been misread; the buyers’ questions are private. In a discreet sale, names, CVR numbers and web addresses are hidden until you release the identity.
• Due diligence checklist: The buyer can use a checklist tailored to the listing and tick off the items. It is also part of the deal package. See the buyer’s side in Checklist before you buy.
• Questions to you: The buyer’s follow-up questions arrive as messages, so the answers are kept together in one place and documented.

Typical questions from the buyer

Finance

• How is revenue split across customers, products and months?
• What lies behind the fluctuations from year to year?
• Can the normalisations be documented?
• How has the current year developed compared with the budget and last year?
• Are there any off-balance-sheet obligations (guarantees, leasing, personal guarantees)?

Customers and market

• How large a share of revenue comes from the largest customers?
• How long have customers been customers, and how many have dropped off?
• Do customers have written agreements, and what happens to them on a change of ownership?
• For digital businesses: Where does the traffic come from, and how dependent is the business on a single channel, platform or algorithm?

Employees and operations

• Who are the key people, and will they stay?
• Are there any pending HR cases, dismissals or pay claims?
• How are the processes documented, and which systems are used?
• Which suppliers are critical, and are there alternatives?

Legal matters

• Are there any pending or threatened disputes, complaints or regulatory cases?
• Does the business own the rights to its name, trademarks, domains, texts, images and code?
• Does the business have the necessary permits, and can they be transferred to the buyer?
• Does the business comply with GDPR, the Danish Marketing Practices Act (markedsføringsloven) and industry-specific rules?

How to manage the process

• Appoint one point of contact — yourself or your adviser — through whom all questions pass.
• Use a question list (Q&A log) with numbered questions, answers, dates and references to documents. That way you avoid duplicated work, and you have documentation of what you have disclosed.
• Answer quickly and precisely. Slow answers create distrust and delay the process.
• Answer only what is asked, but do not hide anything material.
• Agree a timetable with an end date for due diligence.
• Keep the business running. Involve your accountant and possibly a trusted employee to find documents.

Duty of disclosure and liability

What you disclose in due diligence affects your liability after the deal. The purchase agreement often contains a provision stating that the buyer cannot bring claims for matters disclosed in the data room (“disclosure”). Conversely, withholding material information can have serious consequences. So the rule is: disclose too much rather than too little about problems, and make sure the information is documented in the data room or in the Q&A log.

When due diligence uncovers something

Almost every due diligence process uncovers something. The question is how it is dealt with. Minor issues are typically resolved with a specific warranty or an indemnity in the purchase agreement. Bigger issues can lead to a price reduction, part of the purchase price being placed in escrow or, in the worst case, the deal not going through. Approach the discussion calmly: Is the problem already reflected in the price because it was disclosed? Can it be resolved before completion? And what does it really cost?