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Buying a business:
Due diligence

Before agreeing Heads of Terms you will have found out certain information about the target business, but you will not have been given all the information that you require to thoroughly investigate the business. Once you have come to an agreement in principle with the vendor over the terms of the sale, you then need to find out as much as you can about the business before you are committed to buying it. Due diligence is the process of making appropriate enquiries into the company or business you are acquiring or investing in. It serves several purposes:

You know at the outset what you are getting into, so that there should be no nasty surprises later.

What you find out may affect the amount you are prepared to pay, the warranties and indemnities included in the final contract, or even whether you want to go ahead with the deal.

Any legal agreement giving effect to the deal may deny you redress if you later discover something which you should have known if you had carried out appropriate enquiries with due diligence.

Due diligence will typically cover the company�s commercial activities, management and employees, accounting systems and management information, accounting policies, premises, intellectual property rights, assets and liabilities, taxation, trading results, budgets and projections and cash flow forecasts. Points considered include, for example:

assets: what is their value and are there any hidden liabilities?

employees: you will automatically become the employer of any employees of the business at the time of the acquisition under the TUPE regulations (Transfer of Undertakings (Protection of Employment) Regulations 1981). You need to take account of the costs of maintaining their terms and conditions, or any redundancy costs.

commercial relationships: you need to consider all the contracts that the business has. You should identify any onerous contracts or consider the likelihood that any beneficial non-contractual relationships would continue after the acquisition.

market and competitors: you need to be confident of the potential for growth.

financials: you will probably have placed significant reliance on the business' financial information in coming to the offer price, and the financials needs to be scrutinised.

systems and controls: if the business' systems (including IT systems) and controls are poor then this may cast doubt on the quality of the financial information. This could impact on the basis of valuation of the company and the post acquisition cost of improving the systems.

You need to ensure that you negotiate enough time for the due diligence to be completed properly; we recommend not less than 4 weeks. Some of the due diligence will be for you or other advisers (such as surveyors and lawyers) to carry out; but we can carry out all the financial due diligence and often co-ordinate the whole process.