Acquisition Due Diligence – Getting it right

 

Maung Aye, Associate Solicitor at Mackrell Turner Garrett

Maung Aye, Associate Solicitor at Mackrell Turner Garrett

The due diligence process is one of the most important and underestimated stages in the acquisition process.

For acquisitions which are subject to English law, the principle of “caveat emptor” applies which means “buyer beware”. A buyer will therefore need to conduct a thorough investigation of the target business to know, amongst other things, the extent of any liabilities it will be assuming.

If this investigation is not thorough enough, the buyer could end up with a target business which is worthless.

 
 
There are three main strands to any due diligence review. The first is legal due diligence, carried out by the buyer’s legal team. This will include looking at the target’s commercial contracts, intellectual property issues, corporate structure and contracts for its employees and consultants.

The second strand is financial due diligence, which will focus on the target’s audited accounts, management accounts and any financial forecasts. This is usually carried out by the buyer’s tax advisors.

The final strand is commercial or business due diligence and this is often carried out by the buyer’s management team. This is an underestimated aspect of the due diligence process which buyers rarely focus on but is important, particularly when the buyer does not have any experience in the target’s industry.

This strand of due diligence should look at how the target is placed in its industry, whether it is an industry leader with a good reputation for example, and who its competitors are. The buyer will also need to look at how the target is run and whether it will have the necessary personnel to run the business if the team acquired is not up to scratch.

Ultimately, the purpose of the due diligence exercise is for the buyer to ensure that it is making a sound commercial investment. If at any point during the due diligence process the buyer finds something of concern, it may be able to negotiate additional warranties or indemnities in the purchase agreement, negotiate a price reduction for the target or ultimately it could even walk away from the deal.

An important point to remember is that a scatter gun approach does not often work in a due diligence exercise. Buyers need to instruct their team to focus on the key areas of concern. This will not only ensure that the due diligence process is focused on the areas that really matter to a buyer, but it will also ensure that it is as cost efficient and as quick as possible, elements which are always key to any acquisition.

From a seller’s perspective, getting the target’s house in order is key and this process should be started months, if not years before a potential sale is on the horizon. Sellers can be sure that when faced with a competent and experienced buying team, no stone will be left uncovered. Sellers should be prepared to provide everything from written terms of business and contracts with suppliers through to employment contracts and policies, intellectual property licences and even details of any litigation against the target.

While the due diligence process can seem daunting at first, the key is early preparation and having an experienced and commercially focused team of professional advisors who can guide you through to completion of a successful acquisition or sale.

 

Maung Aye

Mackrell Turner Garrett

020 7240 0521

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