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Corporate Transaction Series (2/5): Due Diligence

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In our second instalment of our corporate transaction series, we look at the vital role that the due diligence process plays in making a success of any transaction.

Having made the decision to acquire a business, the buyer will want to maximise the likelihood that the acquisition will be a success, not just in terms of the acquisition itself, but more importantly the long term integration of the new business.

Why is due diligence important?

The principle of caveat emptor (or “buyer beware”) will apply upon completion of the transaction, whereby the buyer will inherit all that comes with the acquisition – both the good and the bad. Therefore, the prospective buyer will want to be sure that the seller and (in the case of a share purchase) the target company has good title to the assets being bought and to know the full extent of any liabilities it will assume. With this in mind, a thorough and targeted due diligence process is essential to guide negotiations regarding the level of contractual protection that the buyer will seek in the form of warranties and indemnities. It may even reveal to the buyer that they will be unable to achieve what they desire from the acquisition, or that moving forward would be too risky.

What will it involve?

The due diligence process will involve the gathering of information that will facilitate the buyer taking effective control of the target’s business. This might involve gathering information on aspects of the target company such as market conditions, competition, production, sales, marketing and R&D. Ascertaining the financial affairs of the target company will also be important, for which an accountant will usually be instructed to conduct a report.

It is vital that the seller does not share information with the buyer until a non-disclosure or confidentiality agreement has been signed. For more information on this, please read our previous article here.

If you are looking to buy or sell a business or shares in a company and would like to discuss how we can help you with this process, please contact Danielle Collett-Bruce in BakerLaw’s Company and Commercial department at danielle.collett-bruce@baker-law.co.uk or call 01252 931 116 to discuss further.

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