What is due diligence and why is it so important?

What does due diligence mean to you? To some people it is the legal equivalent of kicking the tyres or looking under the bonnet of a used car.

To some, an unnecessary delay in getting on with the ‘real work’ and to others it means nothing at all.

In fact, due diligence is one of the most important steps in any acquisition process, and one which should be undertaken with care and using specialist advice. Once the ink has dried on the sale contract there is very little a buyer can do if he or she then realises they have bought the proverbial ‘pig in a poke’.

The old legal maxim of caveat emptor – let the buyer beware – means that it is the buyer’s responsibility to investigate properly whatever they are buying – there is no onus on the seller to identify potential issues.

Due diligence is a means by which the buyer can investigate a target business or property, or other asset (such as a debt), and determine whether or not there are any potential skeletons in the closet which might cause him to think twice.

As a buyer, the benefits of seeking to identify potential issues and liabilities in this way are that it puts you in a much stronger bargaining position when it comes to contract negotiation. If, for example, you have discovered that the target company is in the middle of a complex legal dispute then you can ensure that appropriate action is taken.

That might be putting appropriate indemnities in the sale contact, seeking a reduction in the purchase price, or if it is of sufficient severity, you may consider withdrawing from the purchase. Remember, you are not committed to completing a purchase until the deal is done and sometimes discretion is the better part of valour.

From a seller’s point of view, there is also merit in undertaking your own pre-sale due diligence exercise prior to taking your business to market. This will allow you identify and remedy any potential issues before a buyer comes along, allowing you to present your business information in the best light and putting you in a stronger bargaining position. Ultimately it will help the sale process to proceed more quickly and smoothly.

There is no way of knowing everything about a business target, but sensible and appropriately targeted investigation will ensure there should be no nasty surprises once you take up the reins.

For more information on buying or selling a business, contact our corporate team on 01772 258321.