What is due diligence?

Legally due diligence is the essential investigation prior to the parties negotiating and discussing the various warranties and indemnities in the Share Purchase Agreement for example where the risks for the Buyer are greater than say an asset sale.

The Buyer has made an offer which has been accepted by the Seller. There then follows a period of due diligence where the Buyer seeks to gather as much information as possible to find out that what he is buying is as described on the tin! By doing so the buyer aims to gain a complete picture of the selling business. The buyer will be able to weigh up the strengths and weaknesses of the target and seek if appropriate to reduce the buying price. Sometimes substantially! Many deals fall through as a consequence of due diligence. The information provided on due diligence will be crucial it can be expensive and time consuming and very stressful. The Buyer if it has the resources available to it can use due diligence to its great advantage.

So what would a Buyer be concerned with? Well much depends on the acquisition. For example with a software acquisition, the Buyer would be concerned with Intellectual Property, copyrights and codes and confidentiality. In relation to a large portfolio asset sale, the number of properties would be the subject of close examination. Equally employment and service contracts must all be scrutinized. Often many deals fall down where the large Buyer is concerned as to how the small company has run its operation notably its accounts. Financial due diligence is paramount. Only until the Buyer really gets his dirty will it really understand the true value of the business.

How it works

The solicitors for the Buyer submit a lengthy questionnaire covering hopefully the correct information. The Seller completes and submits, crosses his fingers and waits for a response.

share this Article

Share on facebook
Share on twitter
Share on linkedin
Share on whatsapp
Share on email

Recent Articles