The due diligence process for the purchase and sale of an online business is the most tedious part of the transaction. It is still important, though, and a process that buyers and sellers should be ready for when considering entering into a SaaS or E-Commerce transaction. There are some differences between the due diligence for an online business and that for a brick-and-mortar business that streamline the process (i.e. there aren’t likely to be commercial leases to worry about), but the overarching process is similar.
At the outset, we must note that it is critical that a non-disclosure agreement (NDA) be signed and on file before beginning the due diligence process. This protects the seller when sharing sensitive business information.
The buyer will begin the due diligence process by preparing a list of documents it wants to see and information it wants to know. We use a template for this to get things started for our clients, but in many transactions there are specific things that a buyer wants to know that require additions to our template requests. Some of the standard requests include: corporate origination documents; financial information; key contracts; proof of ownership of intellectual property; and copies of business licenses.
If you are the seller, you should expect to receive this list of requests from the buyer. The best way to prepare is to gather all of your corporate documents into one place. This means your articles of incorporation, shareholder/operating agreement, bylaws, and board consents. It also means your employment agreements, contractor agreements, officer agreements, and IP assignments. You will also need to get your financial statements in order since buyers are going to want to see your financials before closing. As you go about collecting these documents, you may find that some were not properly signed or that some were never created. Your lawyer should help guide you through the process of backfilling any missing documentation.
After the buyer sends its due diligence requests, the seller collects the requested information and documents and shares them with the buyer. This can be done by attaching files to an email or through a file transfer service like Dropbox. Sellers should take care to ensure their documents are encrypted in transport to avoid any unwanted disclosures of sensitive information.
Once the seller submits the information and materials to the buyer, the buyer and its representatives will review the information. The extent of due diligence is often proportional to the size of the transaction—the higher the purchase price the more involved due diligence will be. If everything the buyer reviews meets expectations, then the parties move forward in the transaction process by negotiating and preparing the final transaction documents. If the buyer finds something unexpected, then the issue will be discussed with the seller. A buyer discovering unexpected things during due diligence could have a range of consequences, anywhere from the seller having to answer a few additional questions to a few missing legal documents being signed to the deal collapsing. Sellers should know, though, that the less severe consequences are much more common.