Buying a business: The legal process – Due diligence
We explain the due diligence process in our series of briefings about how to buy a business.
Once the parties have agreed the principal terms, you will begin investigating the target business. This process is called ‘due diligence’ and falls into three main categories:
- Financial – reviewing the accounts and the financial and tax situation of the business. This is normally done by the buyer’s accountants.
- Legal – examining the corporate structure, the contractual and other legal obligations of the business and any regulatory issues. This is usually done by the buyer’s solicitors.
- Business – reviewing the products, market position and trading relationships of the business, which is normally done by the buyer.
Other advisers, such as surveyors, environmental experts or IT specialists, may be needed to investigate specific aspects of the business. Due diligence can help you to identify problems which need to be covered in the sale agreement, and any consents required for the transaction (e.g. from customers). Issues arising from due diligence may make you want to renegotiate the price or even pull out of the deal altogether.
What should you look for?
For example, you will be interested in:
- The trading position of the business – e.g. key contracts, debtors, creditors and capital commitments
- Onerous obligations – e.g. long-term contracts involving high payments
- Ownership and condition of assets – e.g. title to land, the terms of any leases, or the condition of stock
- Employees – e.g. employment terms, salary payments, pensions and other benefits
- Litigation – e.g. disputes with customers or claims by employees
- Taxation – e.g. tax arrears or disputes with the Revenue
- IT/intellectual property issues – e.g. computer contracts and rights to software or trade marks
If the business owns a property, you will need to carry out searches and enquiries (e.g. at the local authority) and you may want to do a survey of the property.
Due diligence is advisable for any buyer, but it can also be expensive and time-consuming. You and your advisers should identify and focus on the areas of particular interest and the specific risks in the relevant industry sector, and you must keep the exercise in proportion to the value of the acquisition.
You should also avoid spending too long on it, particularly if there is a risk of losing the sale to another buyer.
Click here to read the full briefing series: Buying a business.
If you are looking to sell your business, please see our ‘Selling a business’ series.
For more information or guidance, please contact:
Partner and Head of M&A
T. 020 7227 7441
This briefing is for guidance purposes only. RadcliffesLeBrasseur accepts no responsibility or liability whatsoever for any action taken or not taken in relation to this note and recommends that appropriate legal advice be taken having regard to a client's own particular circumstances.