Legal Due Diligence - What and Why?

In a business purchase, legal due diligence is a process of the buyer obtaining and reviewing information about the business and its liabilities and obligations. The buyer can then make informed decisions about whether and how to proceed with the deal.

A buyer may want to consider:

The Company's Corporate Records

• Is it buying the proportion of the business it has negotiated and is paying for?

• Are there any unexpected co-owners?

• How do any agreements with co-shareholders or option holders work?

Arrangements With Sellers

• Are there any director’s loans or personal guarantees?

• Are the any connected company arrangements or other companies a seller is interested in?

• How are sellers remunerated?

Borrowings

• What facilities are there?

• Are there any hire purchase or lease agreements?

• What security arrangements are there?

Customers and Suppliers

• What are the key contracts and do they have change of control clauses?

• Are there any long-term, onerous or unusual contracts?

• Have any contracts been breached and are there any bad/doubtful debts?

Assets

• What assets does the company have and how are they owned?

• What property is held and on what terms?

• Are any assets obsolete, in poor condition or not protected?

Compliance

• What consents does the business need to operate?

• Are there any legal or regulatory issues?

• Has the company implemented prudent procedures?

Employees

• What are the employment terms?

• What bonuses and benefits are there, including pensions?

• Are there any HR issues?

Undertaking appropriate legal due diligence can be a valuable tool for buyers of businesses.

It could assist a buyer by:

• Identifying possible risks and liabilities, including those matters which are high risk.

  
  

• Helping a buyer evaluate the Company commercially.

  
  

• Influencing whether or not the buyer wants to continue with the purchase or renegotiate. Usually, due diligence is undertaken as a first/early step. If the buyer no longer wants to proceed then it will not have incurred wasted legal costs in preparing the purchase contract.

  
  

• Determining the scope of the share purchase agreement’s protection by shaping the warranty schedule and focusing any areas where increased protection is required through an indemnity.

  
  

• Avoiding surprises and prevent disputes. By identifying a problem early, it may be possible to mitigate that risk or readjust the deal terms to accommodate it. Dealing with an issue before purchase is preferrable to reacting to it afterwards.

  
  

• Providing key information, shaping decision making post-acquisition.

I regularly advise sellers and buyers of businesses across a wide range of industries and sectors. I’m committed to getting transactions over the line quickly with sensible and fair sale agreements.

I’m always happy to see how I might be able to help on 07359 989311 or at Robert.Flannagan@acuitylaw.com.