The Sale Exercise – Due Diligence

/ / Selling a Privately Owned Business

The Beer Mergers Bite – Size Business Blog 2024

As in previous years, this is a series of easily – digestible notes working through a variety of business related topics.

In the most recent series of blogs, we’ve looked at wider aspects of business life. In the next series we’re going to focus on all aspects of the business sale process. Our latest Blog looks at the next step, accepting an offer – Due Diligence.

 

Due Diligence is, in essence, an investigation of your business by the buyer to ensure that the assumptions underlying their offer for the business are correct. This should not be of concern, buyers will quite properly use due diligence as a checking mechanism for the acquisition. However, it’s important that you as vendor are properly organised for this process. 

Set out below are six key points to help you navigate through the due diligence process.

  1. The main parts of due diligence are financial, legal and commercial. Other specialist types of due diligence can, for example, be environmental diligence, property diligence, and other specialist reviews of areas such as Intellectual Property and Pensions.
  1. Financial due diligence involves a detailed examination of the financial affairs of the business, with particular focus on historic, current and projected performance. The buyer will test the assumptions behind the trading and profit projections, as those will have formed the main basis for his offer.
  1. Legal due diligence is undertaken by the buyer’s solicitors, and will focus on key contracts and other legal documentation. Issues such as ownership of assets, exposure to litigation, contingent liabilities and intellectual property rights will also be reviewed.
  1. Commercial due diligence effectively encompasses all other investigation by the buyer, generally undertaken by the buyer themselves in collaboration with you as vendor. In simple terms this is “getting under the skin” of the business and understanding the key factors which “make it tick”.
  1. Your lawyers will guide you through the practicalities, but one important thing is for you to be well organised throughout the whole diligence process, and to keep full records of all information that has been handed over or discussed, as that will be part of the legal completion process.
  1. Due Diligence may often throw up queries and observations which will require further discussion between you and the buyer, which may genuinely not have been known before Heads of Terms were agreed. This should not be seen as attempts to “chisel down” the price, but part of the normal process and these can almost always be addressed through proper co-operation and discussion.

Once the due diligence process has been completed and all issues have been dealt with, the lawyers can progress with the finalisation of the sale contracts and the final phase of the completion process and the legal Sale & Purchase Agreement.