Expert View
THE IMPORTANCE OF DUE DILIGENCE
by Debbie King Partner at Farleys solicitors
When acquiring a business via an asset acquisition or acquiring a company via a purchase of shares, due diligence is a vital part of the process.
As a buyer you need to understand exactly what you are buying before committing to the purchase. You have to ask the right questions to obtain that information, as the seller is not under any duty to disclose all relevant information to you.
With a business/asset acquisition you can choose which assets and liabilities you will acquire and those which the seller will retain.
However, with a company/share acquisition, you will acquire the company with all of its existing assets, but also all of its existing liabilities.
Therefore, the due diligence process enables you to establish where any areas
of risk may lie. If you then anticipate that you may suffer a loss after completion of the purchase as a result of any such matters, such as an ongoing dispute with a third party, that risk can be dealt with accordingly in the main sale and purchase agreement.
Alternatively, material issues which arise as part of the due diligence process could force you to walk away from the deal or give you the ability to re-structure the transaction or negotiate a reduction in purchase price at an early stage.
Depending on the size and complexity of the transaction accountancy, tax and legal due diligence are likely to always be required, but commercial, IT, insurance, and operational due diligence may also be necessary.
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to be readily sensitised for different future trading scenarios.”
He adds: “While deals are often driven by the performance of the business and the outlook in a specific sector, nothing exists in a vacuum, and it is becoming increasingly important to look at the bigger picture and what’s happening across the economy and society more generally.”
That includes the growing importance of Environmental, Social and Governance (ESG). Stephen says: “If big businesses are dictating that organisations in their supply chains need to perform better from an ESG point of view, then to be attractive to a buyer, your business probably needs to think like this too.”
When it comes to actually doing the deal, legal experts stress that due diligence is a vital part of the process for those looking to make the purchase. Again, it comes down to asking the right questions to establish if and where there is risk.
Debbie King, a partner at Lancashire headquartered Farleys solicitors, says: “Depending on the size and complexity of the transaction, accountancy, tax and legal due diligence are likely to always be required, but commercial, IT, insurance, and operational due diligence may also be needed.”
Michael Barker, partner at Preston headquartered accountants and business advisors WNJ, says planning a proper exit strategy is vital for any business owner.
He says: “Putting one in place will help when it comes to decision making and will make the process, when it happens, easier and more profitable.
“The strategy you create then needs to be continually revisited to ensure it still fits with your situation and your personal goals, as they can change over time and depending on the performance of the business.
Whether you’re
preparing to buy or sell a business, arguably the most important factor to success is sound long- term planning
“Creating a clear exit strategy requires both time and care. Business owners need to be clear of their financial goals and how long they want to stay involved.”
He adds: “If your business has investors or other stakeholders, you need to keep them informed of your intentions and the strategy. When it comes to a family business it is important to talk – and listen – to those who will be affected by your decisions.”
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LEGAL VIEW
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