Should I give a large non-refundable deposit to see a seller's customer list in due diligence?
October 01, 2021
by a searcher from Cornell University in Sunnyvale, CA, USA
How should I handle a seller asking for a large non-refundable deposit in order to see his full customer list during DD? The seller has high-profile customers that he wants to keep confidential, so on one hand, I understand his concern. But on the other hand, we’ve signed an NDA and it’s the seller’s obligation to share the list as part of due diligence.
Wondering how I should handle this. Any advice?
from Babson College in Boston, MA, USA
It seems possible that your buyer doesn’t understand that even if you had his customer list, including customer SSN’s, blood samples, and Zodiac signs…..you do not have the business assets in operation to serve these customers until you buy from him. IF you are also approaching his competitors to buy then he might have cause for concern, but if that was the case you’d be under LOI with multiple industry players simultaneously, which isn’t likely. You’re buying his assets, and the customer list is part of that. You need enough info to do DD. You should explain the whole process to your Seller, and guide him through it, so he doesn’t feel dragged through it. He can give the customers alpha-numeric codes so you can analyze, and then once you select the critical customers, he can unmask the ones you’ll need to speak to for DD. He needs to understand that you might abandon the deal based on the results of customer DD, so a deposit is premature, and you definitely will if you can’t do any customer DD….but you should explain why customer DD in an LBO is so critical.
He knows his business best, so you fear the asymmetry of his knowledge. You may know LBO/Asset sale better and he fears the asymmetry of your knowledge.
Help him, help you.
from The University of Chicago in Chicago, IL, USA
1) You should not pay. I never had any seller ask or buyer pay.
2) We rarely (almost never) disclose customer NAMES to buyer until all critical aspects of closing are out of the way, including few rounds of purchase agreement. Sometimes, at rare occasions, names are delivered at closing. Having said that, a buyer is FULLY entitled to know anything and everything about the customer (but not names). There is a delicate balance to achieve these two seemingly contradictory needs. Every situation has a unique solution###-###-#### years ago, before email, excel, etc., a banker demanded to see customer list before funding. Seller gave me the printout. Banker came to seller's office w/o buyer. She saw the customer names and funded the deal###-###-#### years we did an e-commerce deal which was a carve-out from a larger company. Buyer's CPA (Bill W who opines here) came up with an idea. His firm took the fiduciary responsibility to look at customer names and related information, and promised seller not to share names with buyer.
There many other ways to address this.
Searchers have a unique challenge b/c if they have multiple parties in the equity capital stack. These investors may ask for customer names early in the game (unless they have experience). If a Searcher was writing a check out of his/her pocket then the Searcher does not have to answer investors.