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The Importance of Due Diligence in a Business or Share Acquisition or Sale

Before proceeding with a business or share purchase, it is important that a buyer gathers as much information about the target business or company as possible to understand what it is taking on, as when a buyer acquires a business or the shares of a company the general principle of “buyer beware” applies. This is a process known as “due diligence”.

Due diligence is typically a detailed investigation and appraisal of the current and historic condition of the target business or company being acquired. The information obtained during this process will assist the buyer in:

  1. Understanding what it is acquiring as part of the acquisition and establishing the seller’s ownership of the target business or shares in a company;
  2. Establishing the right price is being offered for the target business or company;
  3. Identifying any liabilities or risks which may affect how the deal is structured and/or the buyer requires protection in the main sale agreement through warranties and indemnities;
  4. Identifying any third party consents which may be needed to approve the acquisition; and
  5. Ultimately deciding whether it wishes to proceed with the purchase.

Types of Due Diligence:

In order for a buyer to obtain a full picture of the target business or company, it will need to undertake both legal and financial due diligence.

Legal Due Diligence:

This process will usually consist of the buyer’s legal representatives sending an information request (or questionnaire) to the seller and their legal representatives requesting as much useful and important information on the target business or company as possible. These enquiries would usually cover the following aspects:

  1. In a business purchase, the included assets and liabilities (and excluded assets and liabilities) the buyer will be acquiring;
  2. In a share purchase, details of the target company’s constitution (including issued share capital);
  3. The target business’ or company’s employees, contracts, licences, real estate property, intellectual property rights and its IT system; and
  4. Any litigation or disputes the target business or company is a party to.

The seller and its legal team will then gather the information requested and provide appropriate replies to the enquiries raised. The buyer’s legal representatives will then evaluate the information and replies and will usually provide a due diligence report to the buyer, highlighting the main areas of concern or risk to the buyer.

Financial Due Diligence:

This process will usually be conducted by the buyer’s accountants, who will raise enquiries relating to the accounts and historic trading performance of the target business or company, along with its tax history, to identifying any issues which could be disputed by HMRC.

It is therefore important the buyer’s legal representatives and accountants work closely together to ensure the appropriate legal and financial due diligence enquiries are being raised in respect of the target business or company.

How can Glanvilles help?

If you are purchasing a business or company and require any further information or advice on the above, or require assistance with the acquisition process generally, please do not hesitate to contact Scott Richardson by phone on 01329 227907 or by email on [email protected].

The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute, legal advice, and should not be relied upon as advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article. All content was correct at the time of publishing. Legal advice should always be sought in relation to specific circumstances.