Due Diligence – getting it right
When selling a company or a business, the seller is not under a duty to disclose all relevant information to you. The general principle of “caveat emptor” or “buyer beware” applies, which means the buyer should be conducting a thorough investigation before any business or company is bought. Except in cases of fraud or misrepresentation, the law does not protect a buyer who buys a business or company and later finds out that it is not what the buyer thought.
Know what you are buying
The purpose of due diligence is to discover if the business or company that you are buying is what you are expecting.
To fully understand and appreciate what you are buying, a thorough investigation should be done. You will need to understand the material business contracts, licences and permits, employees, intellectual property rights, assets, business practices and claims history of the business. You will also want to understand on a practical level what challenges the business might face in the future and where opportunities for growth might be.
Advantages of due diligence
A good due diligence exercise can highlight past events which have affected earnings and show what potential events might affect future cash flow or projected earnings. All of this information can help you establish whether you are paying the right price.
Further to this, if during the due diligence exercise you uncover any potential issues or hidden liabilities which have not been disclosed, this information could be used as a strong bargaining tool to negotiate a lower price. Remember, when buying a business or a company, information is power!
Another advantage of a due diligence exercise is that it allows you to deal with any issues up front. If you find out about a problem after completion, you may need to rely on bringing a claim for breach of warranty or representation, which is a far from certain process.
Getting the right team in place
When you decide to proceed with a due diligence exercise, you need to ensure you are prepared. You should choose a person within your organisation to manage the due diligence process from your end. This person will be on the front line, communicating a lot of information to your legal advisers, including what is commercially important and material to you. This person must have a full understanding of the transaction and what your overall goal is here.
When choosing your legal advisers, you should ensure you select advisers who have extensive experience of acquisitions of businesses and companies. Ideally, they should have experience in the target company’s industry. This should mean they have the knowledge and skills required to identify all material issues that you need to be aware of.
How we can help
Legal due diligence is a time-consuming exercise but when properly executed, it often becomes a vital part of the overall transaction. The Corporate & Commercial team at Sykes Anderson Perry Limited are experienced in carrying out comprehensive due diligence exercises on target companies and businesses operating in a wide variety of industries. We will work with you and focus on your key concerns to ensure you know as much as possible about what you are buying.
For more information or if you would like to discuss anything, please do not hesitate to contact me.