Mergers and Acquisitions Due Diligence – Making sure what you think you are getting is actually what you get!
Published 7 February 2020 – By Lynsey Henderson
So you are buying or selling a business – the heads of terms have been agreed and signed, what can you expect to happen next?
Usually the buyer’s solicitor will kick off what is referred to as the due diligence process by sending out an initial due diligence questionnaire for completion by the seller. Due diligence is a term that you are going to have to get used to during the transaction and the chances are, it’s a term that you could be pretty sick of by the end of the process! However, no matter how cumbersome the process may seem, it is absolutely fundamental to get it right in order to avoid any nasty surprises, for both parties.
The primary function of the due diligence process is to ensure that any material facts about the transaction are accurate and truthful in order to minimise any risk. It also gives the potential buyer or investor information in relation to any areas of the business that may require further investigation so as to gain a better overall understanding of the business. On the other hand, from a seller’s perspective, disclosing information via the due diligence process can be a good form of protection from potential warranty claims post-completion. The process covers both financial and legal due diligence and will be completed in conjunction with both your legal and tax advisers.
The initial legal due diligence questionnaire is essentially a list (albeit, a very long list) of things that the buyer would like to see, organised into particular sections such as accounts and finances, contracts and agreements, employment information, property details and so on and so forth. Essentially, it gets to the fundamental core of the business in question.
It goes without saying, if you are supplying this level of information to another party, whether they are a competitor or not, it’s important that there is a legally binding, well-drafted non-disclosure agreement in place to protect the privacy of the information.
For sellers in particular, this whole process can be a pretty painful procedure. Because the due diligence process goes to the heart of the business itself, it can require significant manpower in gathering and producing all of the requested documents. After this, there are often numerous rounds of additional queries which follow on from the initial documents and if it is a particularly large business, you may find that this process alone can take a several weeks.
It is important that sellers familiarise themselves with a sample due diligence questionnaire as early as possible in order to understand what requests might be coming their way and to allow them to plan how gathering this information might play out operationally. If you know that you’re going to be selling your business, it might be prudent to start organising the key documents even before you are in the middle of the heavy negotiation stage.
Although this process is a very involved process that does require a lot of client involvement, MKB Law can help take the sting out of it for both buyers and sellers by front loading and managing the legal due diligence process on your behalf.
Our team of corporate lawyers have extensive experience in reporting on and managing the process and dealing with the overall project management of complex mergers and acquisitions. We can set up and manage virtual data rooms to upload and safely store and organise documents, along with ensuring that any documents sent to the buyer’s solicitor are fully compliant with GDPR. For potential buyers, we have wide-ranging experience in condensing key information and reporting back to clients along with the understanding to ask the right questions in order to gather a full picture.