When committing to the acquisition of assets or shares in a company, it is important to ensure you have undertaken a full investigation so that any hidden liabilities, losses or other problems which may become your responsibility after the acquisition has taken place, have been discovered as soon as possible.
Due diligence will involve the investigation of various aspects of a company such as employment, health & safety, commercial and tax.
In an acquisition, due diligence is undertaken prior to the share purchase agreement or asset purchase agreement being entered into. If any issues are discovered during this process, the buyer can decide not to proceed with the transaction or can use this as a negotiating tool.
If an issue only comes to light after completion of a transaction, whilst the buyer may be able to claim against the seller for a breach of warranty, this process is time consuming and expensive. It is therefore advisable to request as much information as possible during the due diligence process in order to ensure the buyer is fully aware of any issues prior to completion.
The due diligence process
The buyer’s solicitor will send a set of questions to the seller’s solicitor in order to obtain as much information as possible. The buyer’s solicitor will then review the information they have been provided with and will raise further questions if needed. The information received will form the basis for their due diligence report.
The due diligence report aims to advise the buyer of any risks involved in the acquisition by setting out key issues and how these can be resolved prior to completion of the transaction.
Virtual data rooms
When providing the requested information, it is common for the seller to upload this information to a virtual data room. This data room allows each party to login and have access to the various documents that have been provided in relation to the transaction. This makes it easier and quicker to locate documents and to know which documents have already been provided.
Whilst the due diligence process will take up a lot of the seller’s time it is extremely important for the buyer in order to help them assess the risks involved with any issues as soon as possible.
If you have any questions, please get in touch with me or anyone else within the Corporate Commercial team on 01256 320555.
Corporate Commercial Solicitor