The due diligence process in mergers and acquisitions

Mergers and acquisitions will almost always involve significant amounts of due diligence. This is because the buyer will want to ensure that they know as much as they can about what they are buying.  After all, on a share acquisition, they will assume all liabilities, contracts, risks and issues of the target and so due diligence is a vital part of the merger and acquisition process. 

What is Due Diligence?

Due diligence is a process of verification, investigation, or audit of a potential deal to confirm all relevant background information, facts and legal, commercial and financial information of the target. Due diligence is carried out at a relatively early stage of a deal in order to provide the buyer with an assurance of what they’re acquiring. It can take various forms – from simple desk-top investigations using publicly available records, to full-scale visits to a business premises, to looking at every aspect of its operation using a virtual data room. 

Importance of Due Diligence? 

Due diligence is important because when shares or assets are sold in a business the overarching principle of caveat emptor or “buyer beware” applies. This means that if you buy a business, English law dictates that it is down to the buyer to ensure you know exactly what they are acquiring. Therefore, it is important as it helps the buyer to feel more comfortable that their expectations regarding the transaction are correct. It may be seen that due diligence is solely for the buyer’s benefit, however, it may also be a benefit to the seller as going through financial examination, for example, may reveal that the fair market value of the seller’s company is more than what was initially thought to be the case. It may also be that the terms of the legal documentation provide that information provided to a buyer during due diligence prevents the buyer from bringing a post-completion warranty claim against the seller.  Due diligence is therefore a vital fact-finding investigation and can be to the benefit of both parties.

What Does Due Diligence Cover?

The due diligence process can cover all aspects of the target and there is a non-exhaustive list of possible due diligence questions which can be raised. The seller will therefore need to be prepared to provide information and supporting documents on various areas and this commonly includes:

  • Target Company Overview: the buyer will require information regarding the share capital and shareholders of the company and most importantly will need to review the statutory books of the target.
  • Financials: the buyer will be concerned with historical financial statements and related financial indicators, as well as the target’s projections of its future profitability and any debt owed by the target.
  • Commercial & Customer Contracts: the buyer will want to be fully informed of any material supplier and customer contracts, the customer base and sales pipeline and any key terms of key contracts.
  • Intellectual Property: the buyer will want to know what intellectual property is owned and used by the target and the quality of it.
  • Employees: the buyer will want to review the target’s employee base and will want to see anonymised details of employees, including any contractors, and will often request copies of contracts to assess the terms of employment.
  • Legal Issues: the buyer will require details of litigation or disputes involving the target, including any that are pending, threatened or settled.
  • Insurance: the buyer will want to undertake a review of key insurance policies to ensure that they are up to date and provide adequate cover.
  • Property: the buyer will need to be made aware of any property owned or leased by the target and be provided with accompanying documentation. 

Due diligence is therefore an extensive process and is not one to take lightly. The seller should be prepared to disclose all information relevant to the target even if this is not favourable. Although the process can be a tedious one, our dedicated lawyers at Moore Barlow can help support you through the entire process of selling your business and take the lead on the due diligence process to allow you to carry on with your day job as far as possible.

How Moore Barlow can help

When looking to grow or develop your business, it is important to access the specialist knowledge and expertise of a corporate law solicitor, especially those that have a proven track record of helping businesses succeed.

Our corporate team can do just this, having formed trusting and long-lasting relationships with many of our clients, whilst supporting them through a variety of different endeavours. Discover how our corporate lawyers can help your business, whether it’s a private or public company.