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Due Diligence (cont)
Due Diligence (Part 2)
What you need to do
In the second part of this article we will be covering the scope of the investigation
The scope of the investigation will need to cover various areas relating to the business and its affairs, for example:
- the corporate structure of the target business;
- any past and/or pending litigation;
- material contracts and agreements with customers and suppliers;
- employment records, including employee contracts and any disciplinary issues;
- insurance policies;
- operating procedures and policies;
- licences; and
- freehold/leasehold property owned/occupied by the target business.
In addition, the buyer’s accountants advisers will usually deal with due diligence enquiries relating to the financial status and tax records of the target business.
In the era of the #MeToo movement, another area to be considered when investigating a target business is complaints and reports of harassment and misconduct in the business. Given the tendency in corporate governance practices to conceal similar issues and hide them behind confidentiality agreements, the buyer and its advisers should make sure that the due diligence questionnaire specifically addresses these issues.
The findings made during a due diligence exercise will often be summarised in a legal due diligence report, which will highlight areas of concern and recommend how to address them. This might involve specific indemnities or a price adjustment. It might recommend particular warranties. These are statements of facts as to the condition of the target business, usually contained in the acquisition agreement. They assist the buyer to make an informed evaluation of the target and to decide whether the acquisition represents a commercially sound investment. However, they are not a substitute for the due diligence exercise, and the two should be complementary.
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.