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Due Diligence

Due diligence is the process by which a buyer gathers information about a business which it is interested in acquiring.

The process enables the buyer to establish as full a picture of the target business as possible. This will help the buyer to identify any risks associated to the business and also enable it to understand the business better.

A buyer may wish to carry out due diligence on a range of areas including legal, financial, tax, insurance and environmental due diligence. The nature of the business and the transaction will often dictate the most appropriate areas which a buyer should consider carrying out due diligence on.

It should be noted that because of the greater risk assumed by a buyer in a share purchase (click here to see article "Share v. Asset Sale"), the amount of due diligence on a share sale can often be greater than that required for a business and asset sale (where due diligence is only required on the assets and parts of the business which are actually transferring).

The due diligence process is usually carried out as early as possible to ensure that the transaction is, from the buyer's point of view, a viable one.

In terms of the legal due diligence, the buyer's solicitors will usually submit a due diligence questionnaire to the seller's solicitors for their review. This questionnaire should, wherever possible, be tailored to suit the business being acquired and where a buyer has particular concerns or questions in relation to the business then those should be included within the questionnaire.

Upon receipt, the seller's solicitors will normally assist the seller in collating responses to the questions in an ordered manner. Once collated, the information can be passed on to the buyer's solicitors for their review with the buyer. Normally information is not passed on until the buyer has agreed to keep the information confidential.

The due diligence process may identify particular issues with the target business which the buyer needs to be protected against. The methods by which a buyer can be protected are the inclusion of specific additional warranties (click here to see article "Warranties") within the sale and purchase agreement, the inclusion of a specific indemnity within the agreement against a specific potential liability, an adjustment to the price offered for the business or, in the worst case, advice that the buyer should not proceed with the transaction as the risks are too great.

We can assist a buyer to prepare, organise and undertake an appropriate legal due diligence process. We can also recommend third parties to carry out other specific types of due diligence including in relation to financial and tax aspects.

We can also assist sellers in responding to legal due diligence questionnaires.

For further information in relation to this article, please contact Daniel McCormack.

Please note this information is provided by way of example and may not be complete and is certainly not intended to constitute legal advice. You should take bespoke advice for your circumstances.

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