In a typical share acquisition (where the buyer acquires the entire issued share capital of a target company from the seller) or a business purchase (where a buyer acquires the goodwill and certain assets of a seller), due diligence is essential.

Due diligence, when executed properly, can add significant value to the transaction and will highlight any potential risks that could lead to litigation or otherwise reduce the value of the acquired business.

This is why we would recommend bringing a solicitor on board to assist with the process as early as possible.

Thorough due diligence enables informed decisions to be made as it will review the legal, financial, tax and operational aspects of the company including:

• Contracts
• Leases
• Liabilities
• Employees
• Ongoing obligations
• Financial statements
• Legal standings
• Intellectual property

Why is due diligence important?

Think of due diligence as a critical checkpoint in the transaction journey, benefiting both the seller and the buyer.

In English law, the principle of “buyer beware” applies meaning the buyer shoulders the responsibility for any issues within the target company post-deal.

However, through due diligence, the buyer is able to identify any potential issues or challenges in the target business before taking over and gives the buyer the opportunity to address these prior to taking over.

What can you do if the due diligence raises concerns?

If you do come across anything that is concerning during the due diligence process, there are several options available as the purchaser.

1. Renegotiate the price based on these findings to a price you see as more appropriate under the circumstances.
2. Specific contractual protection on a £ for £ basis, typically referred to as an indemnity, is to be included in the purchase agreement. This means that if the situation covered by the indemnity arises, you would be entitled to receive compensation for your losses.
3. Seek remediation of the specific issue by the seller prior to closing the deal.
4. Worst case scenario, you may find it best to walk away from the deal if you think the issues raised are not worth the risk.

How does due diligence benefit the seller?

For the seller, a pre-deal due diligence process gives the sellers the opportunity to get their house in order before a buyer raises their own enquiries.  It helps to organise paperwork, gather documents, identify and rectify issues and compile necessary information for the transaction.

Due diligence can be a consuming and challenging process, particularly while a seller is running a business at the same time and often keeping the transaction confidential from its employees. By going through this process, it can help everyone focus and can simplify and speed up the transaction.

Conducting thorough due diligence can also offer an extra layer of protection for the seller against potential claims after the deal is done.

What happens if the due diligence process is skipped?

Forgoing the due diligence process opens both the seller and the purchaser up to many risks.

When you purchase a target company, you are taking on both the good and the bad aspects of the business or company.

As a buyer you may be entitled to make warranty claims should undisclosed issues arise post-completion, this could only provide limited financial compensation and does not necessarily account for the inconvenience, stress, management time and reputational damage caused to the business, company and the buyer.

It is always better to identify issues and risks ahead of time so that an assessment of the risk can be made before completion.

A buyer might hesitate to pursue a claim against a seller, especially if there is an ongoing relationship with the seller after the deal is done.

A seller will also have the benefit of certain protections which means that a buyer may need to satisfy certain financial requirements within certain time limits before a claim can be made against a seller.

If any legal disputes arise, they will be time-consuming and costly, which can be frustrating when they could have been avoided if due diligence had been completed as part of the transaction.

If you have any questions about due diligence or would like some advice on the merger and acquisition process, please get in touch.