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Due Diligence

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To Buy Or Not To Buy

For most Buyers of businesses the objective will either be to acquire the Target Business and continue to run the business on a standalone basis but with an increased margin, or alternatively to integrate the Target Business into an existing business thereby saving overheads, taking advantage of the economies of scale and increasing profitability still further.

If the aims are to be achieved it is important that the Buyer asks the right questions and has a clear view of what he or she is acquiring.

The questions asked during the due diligence process will, in the main, focus on those areas where the Buyer sees the business as having value but it is important for the Buyer also to look at areas of potential risk and at those things which could conceivably prevent the Buyer from achieving what he or she has set out to do.  Due diligence essentially covers three areas:

  • Commercial
  • Financial
  • Legal

Commercial relationships are the lifeblood of any business.  As part of the due diligence process it is important to find out about all commercial relationships, the terms of those relationships and in particular whether the relationships will be jeopardised as a result of any change of control of the Target Business.From an operational point of view, the Buyer will be well advised to look at the assets of the Target Business and consider whether they are adequate for the job in hand or whether provision will have to be made for acquisition of replacement and/or additional assets.

The importance of the financial position of the Target Business cannot be over emphasised. The accounts must be verified and the Buyer must be satisfied that the accounts give a true picture and that there is nothing likely to crawl out of the woodwork at a later stage, for example where within the assets there are debtors which long since should have been written off.  Having verified the accounts, the Buyer will wish to be sure that there have been no changes in the financial position of the Target Business since the date of the last published accounts.

It will be essential for the Buyer to have a clear understanding of the way in which the Target Business is financed and the ongoing commitments for which he or she will become responsible on acquisition.  The Target Business will be tied into some arrangements but on other arrangements the Buyer may be able to shop around.

We cannot leave the subject of finance without mentioning tax.  The Buyer will require reassurance that the tax affairs of the Target Business are in order and, furthermore, that proper provision has been made for all tax that is due, and that the seller has not done anything during his or her stewardship of the Target Business which will lead to adverse tax charges sometime in the future.

Property/real estate is another area where careful research is vital.  If the Target Business is to be relocated and integrated with an existing business, how easy will it be to sell a freehold; or in the case of a leasehold, what is the ongoing commitment and will it be possible to be released from that ongoing commitment?  If the intention is that the Target Business remains where it is, the Buyer will need to consider whether the premises are adequate, the condition of the premises and the running costs.  If the property is leasehold, the ongoing financial commitment to the landlord will have to be considered.  It is also important to check that there are no environmental issues which might come back to bite the Buyer sometime in the future.

For many businesses in the modern world there is a lot of value locked up in intellectual property rights such as trademarks, etc.  The Buyer will be well advised to engage a trademark specialist to ensure that all registrations are valid and that there are no challenges likely.

For most of us, functioning without IT is virtually impossible.  As with intellectual property, the Buyer really ought to take the precaution of engaging an IT specialist to consider this aspect.

Employees are the vital ingredient of nearly every business in the land.  Generally speaking, the employees will come with the Target Business.  The Buyer must be aware of the responsibilities that he or she is taking on and in the same way as with environmental issues, be sure that there are no claims which could come back and bite him or her at a later stage.  Sometimes engaging a pension specialist to look at pension arrangements will be worthwhile.

Regulation and compliance are key issues in so many sectors these days.  Before any business acquisition takes place the Buyer should look at regulation and compliance and be satisfied that the Target Business is in apple pie order.

Insurances are as important as regulation and compliance.  The help of a specialist insurance broker is recommended.

This is but a snapshot of the issues which the Buyer of any Target Business ought to consider.  Time spent on due diligence will pay a real dividend for the Buyer.  The Buyer will gain an understanding of exactly what he or she is acquiring and that will give the Buyer the ability to plan ahead to ensure that the Target Business is run effectively and profitably in the future.  Alternatively, as a result of due diligence, the Buyer may decide that he or she does not wish to touch the business with a barge pole!

Whatever the decision of the Buyer following due diligence, in practical terms, for the Buyer, time spent on the due diligence process is probably the most important part of the whole acquisition process.