Selling Your Technology Company: The Due Diligence Process

When you're selling your technology company and you’ve signed a letter of intent with a potential buyer, the due diligence process begins. Up to this point, you’ve likely turned over summary financials and other high-level documentation, but now the buyer will want to get into the details. You’ve probably agreed via the letter of intent to fully cooperate with the buyer as they proceed with due diligence.

Meet the team conducting due diligence

Depending on the size of your company and the buyer’s company, the buyer will assign one or more people to their due diligence team. These may include accounting, financial, legal, operations, HR, and IT experts. The team members may be employees of the buyer or consultants.

You can be sure that when the letter of intent was signed, if not before, the due diligence team began to research you online and has been reviewing some or all of the documents you provided during the informal due diligence stage.

Your main contact with the buyer will put you in touch with one or more of the members of the due diligence team to coordinate the effort. You’ll likely get an introductory phone call to review the buyer's due diligence process and timeline. This call can also help to create a personal connection that can help to keep the process running smoothly.

What should you tell your employees?

One thing that should be discussed on this call is a cover story. Most buyers don’t want to tell all of their employees that the company is in the process of being sold. This can create distraction and stress for the employees. Some might even leave before the deal is done, which can put you in a difficult position whether or not the deal closes.

For these reasons, a cover story is a good idea. You’ll most likely need the assistance of certain employees to provide information during due diligence, and at some point there will be site visits to your company by the due diligence team.

Common cover stories are that “the company is engaging outside consultants to review the business to identify possible improvements” or “a potential business partner is interested in more information on the company.” It’s best to keep it vague and not an outright lie, because your employees may have to deal with or report to members of the due diligence team after the transaction, and starting that relationship with deception is a bad idea.

Due diligence requests

After initial contact, the next thing you can expect is to receive one or more lists of due diligence requests. Requests will typically include:

• Detailed financials and projections going out three to five years
• Copies of customer and vendor contracts
• Bank records
• Corporate documents
• Insurance policy information
• Network diagrams and other IT details
• Information on patents and trademarks
• Employee records
• Customer references
• Details on any lawsuits involving your company
• Customer listings and customer support records

This is by no means an exhaustive list, but as you can see, the buyer will want to look at every aspect of your business.

Depending on the size of your company, there may be items on the list that don’t apply to you. The buyer will expect this, so just discuss them with your main due diligence contact.

The bar is set fairly high, but there are still things that are unreasonable for a buyer to request. For example, if a buyer asked to have access to the selling company’s email system to review internal emails, this would be unreasonable. If a request sounds ridiculous, it probably is, and should be discussed with the head of the buyer’s due diligence team.

More articles from AllBusiness.com:

• How to Perform Due Diligence Before Buying a Business
• What Is Due Diligence in Business Acquisitions?
• Selling Your Technology Company: Five Ways to Kill the Deal
• How to Create a Professional Website in 24 Hours
• What Does ‘Due Diligence’ Mean When Buying a Business?

Site visit by the due diligence team

When the buyer has had the opportunity to complete their own research and review your responses to the due diligence request list, a site visit is the normal next step.

Your due diligence responses will most likely generate additional questions. During the site visit, the due diligence team will want to spend time with their counterparts at your company to get answers to these questions.

It’s also expected that the due diligence team will want to speak with key employees they’ve identified, and possibly even a random sample of other employees. This is where having your cover story straight is important.

The site visit may last anywhere from a day to a week or more depending on the size of the transaction or the complexity of your business. Other onsite activities may include tours of facilities, product demos, and a review of your data center or hosting platform.

Due diligence report

After the site visit, the due diligence team will compile a due diligence report for the buyer. This will include details on your business, identified strengths and weaknesses, cost estimates to mitigate problems that were discovered, and usually an overall “go/no go” recommendation on the deal.

You probably won’t see the report, but you’ll definitely hear about anything in it that’s negative.

At this point, the buyer may decide to proceed with the deal as per the terms of the letter of intent, withdraw their offer, or negotiate further.

Assess the state of your company before you sell

If you understand the things that are important to a buyer when they’re performing due diligence, you can objectively review the current state of your company before you’re involved in a potential sale. Look at sample due diligence lists—they’re freely available on the internet.

RELATED: 10 Questions to Ask Investment Bankers When Selling Your Business