Let’s look at each in turn…

Employee Due Diligence

Under the Transfer of Undertaking Protection of Employees Regulations (known as TUPE), employees are almost always automatically transferred from seller to buyer on the same terms and conditions those employees enjoyed immediately prior to the sale, whether or not they have contracts of employment.

This means that the buyer assumes the liability for the employees whether they are wanted or not. For example, X has been employed in a business for 20 years but the buyer does not need him. That employee is entitled to look to the buyer for full redundancy entitlement. The buyer will need to calculate this liability before buying the business and reduce the price paid for the assets to compensate for it.

On a sale of shares, of course, it is the company that is the employer and the employees’ contracts continue as a matter of course.  Clearly, the same principles will apply to redundancy and price adjustment may have to be made.

Property Due Diligence – freehold or leasehold

On a sale of assets, the property housing the business may be of vital importance to the buyer – if it is restaurant or public house, for example, where location is a key factor. On the other hand, if it is, for example, an engineering company, the buyer may already have premises nearby or wish to relocate.

If the property is leasehold, the seller will normally want to transfer it as one of the assets to avoid liability for paying the rent after the sale.  In such cases, the landlord will have to consent to an assignment of the lease and this will be subject to satisfaction that the tenant will be able to continue paying the rent. This will all involve the landlord’s solicitors and is an expense the seller, as tenant, normally has to bear.

If the property is freehold, the seller may be quite happy to sell it separately. If it is part of the deal, the buyer’s solicitor will need to investigate ownership of the property.

Fixed Assets

This covers all plant and machinery that is “fixed” to the property and cannot be removed without spanners or screwdrivers.  This becomes more important when the property is leasehold. These fixtures may belong to the landlord and remain in the property for the buyer but have little or no value for the purposes of the transfer of the business.

Moveable plant and equipment

An engineering business may have valuable plant and machinery the buyer is keen to purchase. If so, the seller will need to supply particulars of the machine, if it is owned outright or on finance, hours worked etc. Normally, the seller will have prepared an “asset register” for this purpose.

Every business will have equipment it uses for trading purposes. For example, a restaurant will have kitchen equipment, a hairdressing salon scissors and more sophisticated hair dryers. Normally this is all disclosed and contained in a schedule to the Sale and Purchase Agreement.

Stock

Stock represents the “consumable” items in a business. It also includes work in progress.  In a restaurant or public house it will include beer, wine and spirits. In a restaurant, it may also include items such as flour, spices etc – “dry” goods that are still usable in the business following the sale. The hairdressing salon will probably have shampoos, conditioners and beauty products.

An engineering business will not only have stocks of nuts and bolts and the like, but also “work in progress” – part finished products that have to be valued and are payable for on completion of the sale.

Stock and work in progress are all normally valued on the completion date of the sale of the business. Sometimes a seller will want money on account before the sale takes place. Often the value can be agreed between the buyer and seller. In case they cannot agree, stock is valued by an expert in the particular trade and the cost covered jointly by both parties.

“Intangible” Assets/Liabilities

By far the most important intangible assets are the contracts with customers that the buyer will be anxious to scrutinise. As the business is being bought as a “going concern”, these customers are its lifeblood. Any contract that accounts for over 10% of the turnover of the business is called “material”. The risk of losing it may mean the difference between profit and loss.  Some businesses have very few customers. Their value will be of very great importance to buyer and the risk of losing them will play a large part in determining the price for the business. On a sale of assets, these contracts have to be formally transferred and the sale may be conditional on this happening. On a sale of shares, the contracts stay with the company.

This may not be of great consequence in other kinds of business. Restaurants and pubs, for example, may have established very good reputations, but the seller will have no contracts normally to pass to the buyer. It will be up to the buyer to maintain the standard, particularly as the seller will be looking for a substantial payment for goodwill.

Other intangible assets could include intellectual property. For example, internet and IT companies may have developed their own software. Graphic design companies may hold substantial copyrights for their designs. Engineering companies may hold patents for products they have developed. All of these businesses may have registered trade marks. Intellectual property rights can have a substantial value. The buyer will want these rights to be checked out and ensure they are properly registered.

There may also be contracts with suppliers that the buyer wants to continue. These could include computer software licences, banking card machines and the like. Furthermore, some of these supplier contracts may be in the form of a lease. The buyer may or may not want them. On a sale of assets the seller will have to terminate those contracts before completion. On a sale of shares, of course, the buyer is buying the company “lock, stock and barrel” and so will have to adjust the price for the shares if a contract is not desirable.

Debtors and Creditors

If the sale is of business assets, the seller will normally keep the debtors and creditors of the business up to the completion date. The buyer will start from Day 1 with no inherited debts to collect or bills to pay.

In a share sale, on the other hand, debtors and creditors these are included in the sale to the buyer.

In either case, the buyer will want to know how much is owing to the business and how much the seller has to pay to creditors, in order to build a proper picture of the seller’s business activity.

Additional due diligence information for share sales

For share sales, the buyer will need to know the seller has complied with the requirements of the Companies Acts and to see the minutes book, recording the decisions of the directors/shareholders.

The buyer will also want a complete history of the company and will want a rigorous examination of the company’s accounts. In addition, the buyer will want warranties and indemnities against all taxes outstanding prior to the purchase.

Business Accounts

For both asset and share sales, the accounts of the business are crucial. The buyer should request at least five years’ accounts for the business and any management accounts available during the current financial year. They show how well the business is trading, how cyclical it is, whether there are outstanding debtors and creditors, the amount of any bank overdraft, other third party borrowings, leasing and other finance liabilities etc. From this, the buyer’s accountant can provide the buyer with a pattern of the trading history of the business and highlight any cost savings which might be available. The accountant will form a view about whether the business, assets or shares, is worth the price.