Due diligence basics

When you buy a business, whether assets or shares, you will want to be satisfied that the business is worth the price you have agreed to pay for it. This involves a thorough examination of the business and its assets and liabilities.

As a seller, you will hopefully have already spent some time making sure the business is in good order. Instructing us to help you prepare a business for sale will shorten the investigatory period and make sure there are no issues which might give the buyer the opportunity to re-negotiate the price.

As a buyer, you will need to be meticulous in your scrutiny of the relevant information and documentation to make sure you fully understand what you are buying, whether good or bad. We can guide you through this process and ensure any issues or irregularities are identified and appropriately addressed.

It is normal for the seller’s solicitors to prepare and send the due diligence replies with the business sale agreement (“BSA”) to the buyer’s solicitors where the business being sold has a large property element to it. For example, public houses, cafes and restaurants, hair and beauty salons or retail shops.  In other words, due diligence is carried out in fairly quickly. For engineering businesses, the process takes longer as there is usually more information to gather. The buyer’s solicitors will make the enquiries and obtain replies, so that the buyer can assess them before sending out an Sale Purchase Agreement (“SPA”).

What does legal due diligence cover?

Different kinds of business have different types of asset. A pub business will have different compliance issues to an engineering business. There are of course many common features to both. A list of the “tangible” assets/liabilities will usually include:

  • Employees;
  • Property – freehold and/or leasehold;
  • Fixed Assets – those attached to the property;
  • Moveable Plant and equipment, including computer hardware;
  • Stock;
  • Intangible Assets;
  • Debtors/Creditors

See our Due Diligence 101 FAQ for more detail.

How long does due diligence take?

If the seller has the information ready then it will normally take three to four weeks for the buyer’s solicitors to go through everything, so that they can advise their client what more is needed and what they still need to see. The buyer’s solicitors will prepare a due diligence report, highlighting the various concerns they may have. If the seller is not ready to supply the information required by the buyer, it can add at least another month to the process. Having a HoTs in place is very useful at this point. The buyer will be able to go back to the seller, pointing out any matters of concern which may justify a reduction in price.

What follows due diligence?

The buyer’s solicitor will report on all the information received from the seller’s solicitors. If the information discloses no hidden difficulties or other contingent liabilities that could affect the purchase, the buyer’s solicitor will prepare and send a Sale and Purchase Agreement to the seller for approval.

If, on the other hand the due diligence process has thrown up hidden difficulties or contingent liabilities, the buyer will want to re-negotiate the deal. The adjustments may only be peripheral to the price the buyer has agreed to pay. Sometimes, however, the due diligence investigation throws up more serious problems, leading to a re-negotiation of the deal in its entirety. It is at this stage that either party may pull out.