Sell-side due diligence: what buyers actually ask for
The request list buyers actually send, and the four items that hold up most Australian processes.
Buyers ask for the same things in roughly the same order, deal after deal. If you build the room around that order, diligence moves quickly. If you build it around your own filing system, it does not.
The order requests arrive in
- Corporate. Constitution, share register, cap table, board minutes, subsidiary structure.
- Financial. Three years of statements, monthly management accounts, working capital, debt facilities.
- Tax. Returns, ATO correspondence, GST and payroll tax positions, any disputes.
- Commercial. Top customer and supplier contracts, revenue concentration, change of control clauses.
- People. Employment agreements, awards and enterprise agreements, contractor arrangements, key person risk.
- Intellectual property and technology. Registrations, ownership chain, licences, source code arrangements, security posture.
- Property and assets. Leases, plant, encumbrances.
- Legal. Litigation, disputes, regulatory correspondence, insurance.
The four items that hold up Australian processes
Change of control clauses. Buyers want to know which contracts they lose on completion. Read your top 20 contracts before the buyer does.
Contractor classification. If people who look like employees are engaged as contractors, expect a specific and unpleasant line of questioning.
IP ownership chain. Founders who wrote code before incorporation, agencies who never assigned rights, and open source obligations nobody documented.
Cap table and option history. Old option grants without documentation are the single most common reason completion slips.
What to prepare before you open the room
Structure the room by the eight disciplines above, numbered, three levels deep at most. Name files so nobody needs to open them to know what they are: date, counterparty, document type. Decide what is disclosed at first round and what waits for a shortlist, and set the permissions to match before anyone is invited.
Then write your own request list. Ask your adviser for the list they would send if they were buying, and answer it yourself. Everything you find first is a negotiation you control.
Running Q&A without losing the process
Assign a single owner for Q&A. Answer once, in the room, against the document concerned, so the same question from three bidders gets the same answer. Never answer diligence questions by email; the record ends up in someone's inbox instead of the audit trail you will want at completion.
Frequently asked
- What do buyers ask for in due diligence?
- Corporate records, three years of financials plus management accounts, tax returns and ATO correspondence, top customer and supplier contracts, employment and contractor arrangements, IP ownership and technology, property and leases, and litigation and insurance.
- What holds up sell-side diligence most often?
- Change of control clauses in key contracts, contractor classification, gaps in the IP ownership chain, and undocumented option grants in the cap table.
- Should I run my own diligence first?
- Yes. Ask your adviser for the request list they would send as a buyer, then answer it yourself. Anything you find before the buyer does is a negotiation you control.
- How should the room be structured?
- By discipline, numbered, in the order requests arrive, and no more than three levels deep. Reviewers should be able to navigate without being told how.
Questions on anything in this article? Email sales@linkro.com.au.
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