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Due Diligence (Part 1)
What is Due Diligence?
A due diligence review is an independent investigation of the target business by the buyer and its advisers. In English law, the principle of “caveat emptor” or “buyer beware” applies in business acquisitions. This means that the law offers little or no protection to the buyer. It is essential that the buyer carries out its own review of the target business at the negotiating stage through a due diligence exercise, to establish whether purchasing that particular business is a sound commercial investment.
The buyer will want to make sure that the seller has good title to the assets being acquired, to know the full extent of any liabilities it will assume and the contractual protections it will require. The buyer’s lawyers will send their preliminary enquiries to the seller’s lawyers, so that the buyer can be alerted to any particular concerns or issues early on in the negotiations. This will help the buyer to decide whether to proceed with the acquisition and at what price, how to negotiate with the seller and to better plan the integration of the target business with its own.
The scope of the due diligence will depend on the nature of the transaction, but in any case it should be extensive enough to capture all liabilities of the target business. Especially on the acquisition of the entire share capital of the target business (as opposed to purchasing specific assets of the business) the buyer needs to make sure it has a clear understanding of the business and its affairs, since it will acquire it “warts and all”.
When embarking on a business acquisition you should involve your legal and tax advisers early on in the process, to make sure that any issues that could materially affect your investment are not spotted too late. Our corporate solicitors can help.
For further information on Due Diligence look out for Part 2 on this topic
Please note that the information and opinions contained in this article are not intended to be comprehensive, nor to provide legal advice. No responsibility for its accuracy or correctness is assumed by Pearson Solicitors and Financial Advisers LLP or any of its members or employees. Professional legal advice should be obtained before taking, or refraining from taking, any action as a result of this article.