Ask the Expert: Due diligence
All answers are for general guidance only. Each case must be handled on the individual facts.
Q: What is Due Diligence and what does it involve?
Due diligence is the name given to the process of investigating the commercial, financial and legal issues associated with the target business. The buyer will want, and need, to know of any critical issues affecting the business in order to:
• Make an informed decision as to whether to proceed with the purchase.
• Assess the value of the target business and the price they are willing to pay for it.
• Be aware of issues that are going to impact on integrating the target business from day one following completion.
The process can be time consuming, lengthy, detailed and expensive. The best advisers will spend time at the outset getting to know the buyer and its business, and the key motivators associated with its decision to purchase the target business. This will help identify and concentrate on the business issues critical to the purchase, and identify what is important to the buyer.
The due diligence process will then be targeted towards these key issues. This helps save time and unnecessary work through the process and helps build a good working relationship between the respective parties’ advisers – which will pay dividends as the transaction progresses.
The financial advisers will prepare a report comprising of financial and commercial issues. The legal advisers will prepare a report on the legal and commercial issues. Depending on specific issues identified, other experts may need to be engaged (e.g. insurance, health and safety and environmental).
The legal due diligence process focuses on:
• Key commercial contracts (e.g. change of control provisions);
• Any warranties, guarantees or indemnities given in the commercial contracts;
• The seller’s ownership of and authority to sell the assets;
• Litigation history of the target and any current or threatened disputes;
• Employee matters.
As the purchaser it is often worth remembering that the seller can be very sensitive about the process, and time spent reassuring them that the process is intended to identify any critical issues so that the purchase can go ahead with full knowledge rather than to create obstacles, will be time well spent.
Contact details
Stephen Attree
Partner and head of corporate & commercial
s.attree@mlpsolicitors.co.uk
0161 926 1524
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