Previous articles in this series on ‘buying a business’ have dealt with the theory behind acquisitive growth. They have covered non-financial considerations, identifying a target, and negotiating a deal.
Once these aspects have been considered, discussed, and agreed, it is then necessary to carry out due diligence on the target company.
The primary purpose of due diligence is to ensure that what the purchaser thinks they are buying is in fact what they are buying, and to make sure there are no skeletons in the closet!
As mentioned in the first article in this series , businesses that undertake appropriate due diligence on the financial and non-financial aspects of an acquisition are more likely to be successful than those that don’t. Due diligence is, therefore, a vital step in the buying process.
Due diligence broadly falls under three main categories: legal, commercial and financial:
1. Legal due diligence involves investigations intended to verify that transactions have an acceptable legal basis. For example, that the target company shareholders are able to sell the shares, whether the target company has any property and issues around the ownership, employment matters such as claims against a company for unfair dismissal, or ensuring that the company holds its claimed intellectual property rights.
2. Commercial due diligence looks at the future plans and projections, customers, and supplier base of the target business. This considers the impact of income changes to the business, such as what would happen if a major contract was lost, or its costs suddenly increased. Commercial due diligence may also consider the impact on the business if the vendor were to leave following the sale, for example because they are a supplier’s major customer.
3. Financial due diligence , as its name suggests, reviews the financial aspects of the target company, ensuring current assets and liabilities are correctly stated and disclosed, reviewing projections for future performance, and reviewing the tax history of the business.
Both accountants and solicitors are involved in the different aspects of due diligence, so it is important that they are able to work efficiently both together, as well as alongside the purchaser.
Results will detail all issues identified throughout the due diligence process, and should highlight those that are significant in the context of the acquisition. The purchaser should, of course, remain fully updated throughout the process, so that hurdles can be cleared as they arise.
It is worth keeping in mind that the due diligence process will inevitably lead to a number of queries from the purchaser. These could range from potential deal breakers, such as an unreported tax liability or legal claim, or smaller points, such as the existence of an appropriate board minute to approve the last set of annual accounts.
Many of these issues can be resolved during the drafting of the Share Purchase Agreement and associated legal documentation. At this stage, the tips in my previous article [add link] relating to negotiating a deal can be implemented, to ensure that the proposed transaction takes any findings into account.
It is clearly vitally important to ensure a thorough due diligence process has been carried out. However, given that the potential sum of an acquisition could run into many millions of pounds, both sides should be aware of what issues really matter to the transaction, and what must be actioned on that basis. A clear scope of any professional due diligence work should be agreed at the outset, keeping the bigger picture firmly in mind.
Our team at Rickard Luckin can call upon a wide range of experience in different industry sectors, adding vital knowledge to the due diligence process. To find out more about the services we offer in this area, please get in touch.
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