When looking to buy a business, you should undertake due diligence to examine all aspects of the company in question. This column will mainly focus on legal due diligence.
Due diligence is important as it allows you (the buyer) to understand the business that you’re buying and determine whether there’s value for money. In addition, due diligence also allows you to discover all the liabilities and issues related to the business; that the seller may have not disclosed.
Risk cannot be eliminated entirely, but it can be mitigated. As a buyer, you should ascertain:
- How good the cash flow situation is;
- Whether there are any hidden liabilities;
- If key employees will be staying at the company;
- Whether company books/records are up to date;
- That any leases on premises are in order and have not yet expired; and
- What insurance policies are in place.
If the legal due diligence report does highlight certain areas of concern, you may choose to renegotiate with the seller on key elements of the deal, such as the purchase price. You may also seek specific indemnities from the seller in respect of any areas which could expose the buyer to potential future risk.
If after risk assessment and full due diligence is concluded you and the seller are happy to proceed, you will then have to prepare a draft acquisition agreement which will be reviewed by the seller. Findings from the due diligence report will undoubtedly be factored in as required.
If you have any questions regarding due diligence following this article, you can get in touch with us. We offer a free initial chat for all new clients.
01202 499255 | kedwards@frettens.co.uk
www.frettens.co.uk
This article is featured in the March issue of the Dorset Business Focus magazine. Read on the online version here.