What you should know about Due Diligence: A simple guide

Are you on the verge of buying or selling a business? If yes, then you’re about to get familiar with a critical process called Due Diligence.

Here we break it down and outline the process for both buyers and sellers.

What is Due Diligence?

Due Diligence is the process by which investors or buyers investigate their target business’s legal documents, accounts, client and supplier contracts, assets, intellectual property rights, employees, property and premises, disputes, and tax history.

While not a legal obligation, Due Diligence is a critical step in safeguarding investments by providing buyers with a clear understanding of exactly what they’re committing to.

Benefits of Due Diligence

The Due Diligence process allows a buyer to better understand the business they are buying into and learn whether the price they have offered is a fair one. If any serious issues are discovered, the buyer may be able to negotiate a discount on the purchase price.

Alternatively, the buyer may be able to seek warranties and indemnities from the seller which, in effect, gives the buyer a right to claim a portion of the purchase price back if any of the anticipated problems actually materialise.

A well organised Due Diligence process also allows both parties to communicate any problems in the business, and plan for the future; which is particularly important if the parties intend to merge their businesses together.

What’s involved with Due Diligence?

During the Due Diligence process, a solicitor will raise a questionnaire to the seller with a detailed list of questions, as well as a list of key documents they need copies of.

Due Diligence enquiries involve the following:

Corporate information: Company structure and any subsidiaries, shareholders, option holders and directors.

Business and assets: Business plan, key assets and equipment, material contracts with customers and suppliers.

Human resources: Employees, employment contracts, directors’ contracts, salaries and wages, handbooks, disputes, pensions.

Property: Properties owned, leased or occupied by the business.

Information Technology and Intellectual Property: Software and equipment used, maintenance and support contracts, intellectual property (IP) used or owned by the company.

Data protection: How data is stored, safeguarded and used, privacy policies and GDPR compliance.

Litigation and regulatory: Any disputes the company is involved in or likely to begin, and any licenses or regulatory consents.

Health and safety: Any relevant policies, log of incidents.

Insurance: Claims history, insurance policies and premiums.

Financial: Accounts, assessment of tax liabilities, loans, charges and borrowing and VAT. Your accountant will deal with all of this.

Due Diligence for buyers

In simple terms, Due Diligence is doing your homework before buying a business. It’s a protective step that helps buyers:

Spot red flags early: Identify potential deal-breakers in the initial stages.

Understand and manage risks: Understand the areas of risk clearly and decide how to handle them. For unforeseen risks, buyers may want to get a warranty in place.

Negotiate better: Based on the findings, buyers can negotiate the price or ask the seller to take responsibility for certain issues.

Due Diligence for sellers

From a seller’s perspective the Due Diligence process involves answering the questionnaire provided by the buyer’s solicitor honestly and thoroughly. This will help craft a disclosure letter, which is a vital tool in a sale transaction that:

Shields you from future claims: By disclosing everything upfront, you can avoid troubles down the line.

Limits your liabilities: Being specific in your disclosure letter helps in limiting any future liability, ensuring a smoother transaction.

Due Diligence in a nutshell

Whether you’re a buyer or a seller, understanding the Due Diligence process is key to a successful transaction. It might seem complex, but remember it’s there to protect both parties and ensure a fair deal.

Consider seeking the help of experts to guide you through this process – it’s an investment in peace of mind.


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