Due Diligence – Points To Note

For any buyer looking to purchase a business it is essential that his legal and professional teams carry out a thorough investigation of the target company. The process is described as “Due Diligence” and involves the buyer examining the key elements of the seller’s company to ensure the business reflects what the buyer is perceived to be purchasing. The process usually includes:

  1. The buyer’s solicitor sending the seller’s solicitor a questionnaire and requesting several documents.Â
  2. The buyer would then examine these documents ideally at the buyer’s solicitor office, at the seller’s premises or at an offsite data room.

Some key aspects to consider when carrying out due diligence include but are not limited to:

  • A timetable should be put in place to ensure the buyer has enough time to process and assess the documents and the negotiations are not prolonged.Â
  • Staff Confidents – the seller and buyer should avoid publicising the deal prior to the completion of the purchase. With each party instructing some staff confidents to manage the due diligence process.Â
  • Team – each party should have their accountant and legal team in place ready to provide their services when required to do so. The buyer’s solicitor will also prepare the questionnaire in relation to all the legal matters.

During the due diligence process the buyer would want to at least examine the following elements of the business:

  • Accounts
    • Bad Debt
    • Audited Accounts?
    • Age of the Accounts
  • Historical Information
    • Any Inconsistencies?
    • Profit Margins, Growth, Overheads and Working Capital
  • Financial Projections
  • Assets and Stock
    • Stock Levels
    • Legal Ownership
  • Property
    • Property Searches
    • Review of Title Documents
    • Covenants and Easements
    • Planning
    • Surveys and Valuation
    • Lease Review
    • Environmental Issues
  • Customers and Suppliers
    • Review of the Customer and Supplier database
    • Contracts ReviewÂ
    • Can Contracts be Transferred or Assigned?
    • Breakdown of Major Customers/SuppliersÂ
  • Finance Agreements
    • Hire Purchase Agreements
    • Lease Agreements for Equipment
  • Employees
    • Employment Rights
    • Liabilities
    • Redundancies
    • Introduction of New Staff
    • Employment Contracts
  • Intellectual Property
    • Protection of Confidential Information, Trade Secrets and Know How
    • Brand Protection
    • Establishing Ownership
    • Assignment of Intellectual Property
    • Licensing of Intellectual Property
  • Pension Scheme
  • Any On-going or Potential Litigation
  • Commercial Overview
    • Business Environment
    • Identify Potential Opportunities/Risks in the Market
    • Suppliers/Customers Opinions
  • Legal Steps Required

Once the buyer has reviewed these documents and resolved any issues discovered during the due diligence, the buyer and seller are likely to finalise the price and agree any warranties. By carrying out the due diligence process the buyer will have full insight into the sellers business and the commercial, financial and legal position it is in.

Due diligence can be an expensive process and the buyer does not want to be wasting his money on carrying out a process which results in the collapse of the deal. However, it is essential that a thorough investigation is carried out so the buyer is not left with a business that has significant liabilities or is worth a lot less than what the buyer paid for it.

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