In most acquisition transactions, the buyer will want to ensure that the target company have good title to the assets and the buyer will also want to understand what liabilities they are taking on. So what due diligence should you carry out when acquiring another business?
Due diligence is vital for these types of transactions as it will help identify any issues that could impact the purchase price for the acquisition or even help decide whether the buyer actually wants to go through with the transaction. It will cover a wide scope of areas relating to the target company and the seller. Typically the areas covered will be financial, commercial, environmental, insurance and legal.
The starting point is for the buyer to ask for the seller to complete a due diligence questionnaire. This will set out areas of investigation for the buyer and enquiries will be set out for the seller to respond to. All enquiries will be in relation to the seller and the target company.
Areas of Due Diligence
- General Information: this will be in relation to the structure of the target company. It will include details of any subsidiaries of the target, its officers, employees, percentage ownership in the company.
- The Seller: the buyer will want to ensure that the seller is the legal holder of the shares in the target company and will want confirmation that the seller has the authority to sell those shares.
- Financial: the buyer will want to have a picture that clearly sets out how the target has performed. The buyer will want to see the audited/unaudited accounts of the company as well as the management accounts (if any). The Buyer will draw conclusions as to the current performance and use this to draw inferences as to how well the target will perform in the future.
- Property: this may well be the seller’s most valuable asset, and the buyer will want to ensure that the seller has good title and will want to carry out investigations over the property. The Buyer will want to know whether it is leasehold or freehold property. If it is leasehold what are the lease terms?
- Compliance: the buyer will want to ensure that the target and the seller have complied with all statutory provisions including data protection. It may be that the acquisition is in relation to a company that is regulated with the Financial Conduct Authority and therefore the buyer will want to ensure that the target and the seller have complied with those regulations. If they have not then this could lead to worrying information being found in the litigation due diligence detailed below.
- Litigation: the buyer will want to ensure there is no ongoing or potential litigation or arbitration by the target or the seller. If there is a claim it is irrelevant if the target or the seller is the claimant, defendant. This is because such actions can lead to the reputation of the target being tarnished and therefore the buyer may not want to take on such a risk.
There are other areas where due diligence will be undertaken, including, pensions, intellectual property, tax, competition, and contracts. The level of due diligence for certain areas will vary in each transaction, however most of these areas will be investigated to some extent by the buyer.
It is always recommended that the buyer does their own investigations from information that is in the public domain, such as Companies House (company search), the target company’s statutory books, the articles of association, and details of the target company’s members etc.
Once all of the information has been collated, a due diligence report will be produced. It will be the legal advisors of the buyer who will normally produce this report. This is usually provided to the buyer or the board of the buyer (if it is a corporate purchaser). The report will include any issues that the due diligence has brought to light. The board of the buyer would then discuss the feasibility of proceeding with the transaction.
Here at Josiah Hincks, our corporate team will guide you through the entire acquisition process and will assist you through the due diligence process, identifying the issues that have been brought to light through the investigations.
For more information on company acquisitions please contact either Justin Wilson or Andrew Eagle, whose details can be found on our website.
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