{"id":4574,"date":"2022-06-29T04:15:51","date_gmt":"2022-06-29T03:15:51","guid":{"rendered":"https:\/\/legalvision.co.uk\/?p=4574"},"modified":"2025-07-02T00:41:21","modified_gmt":"2025-07-01T23:41:21","slug":"due-diligence-business-purchase","status":"publish","type":"post","link":"https:\/\/legalvision.co.uk\/business-sale-purchase\/due-diligence-business-purchase\/","title":{"rendered":"Due Diligence in a Business Purchase in England"},"content":{"rendered":"\n<p><span style=\"font-weight: 400\">English law operates under the principle of <\/span><i><span style=\"font-weight: 400\">caveat emptor, <\/span><\/i><span style=\"font-weight: 400\">meaning that the buyer takes the business as is. Accordingly, if you finalise the transaction and discover some defect in the value of the business, you will not have any recourse against the seller. The only exception is if there is a term in the <\/span><a href=\"https:\/\/legalvision.co.uk\/business-sale-purchase\/5-tips-when-purchasing-a-business-in-england-and-wales\/\"><span style=\"font-weight: 400\">purchase agreement<\/span><\/a><span style=\"font-weight: 400\"> that says otherwise. Therefore, the buyer is responsible for uncovering any hidden liabilities, risks, and defects that might impair the value of the business. The process for uncovering this is called due diligence. <\/span><span style=\"font-weight: 400\">This article will provide an overview of a buyer\u2019s due diligence process in a business purchase.&nbsp;<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span style=\"font-weight: 400\">Due Diligence in a Business Purchase<\/span><\/h2>\n\n\n\n<p><span style=\"font-weight: 400\">The due diligence process (<\/span><b>DD<\/b><span style=\"font-weight: 400\">) depends on how parties to a transaction wish to structure the business purchase. Generally, the buyer would prefer an asset purchase because it limits the scope of the DD to the relevant assets. On the other hand, a <\/span><a href=\"https:\/\/legalvision.co.uk\/business-sale-purchase\/share-purchase\/\"><span style=\"font-weight: 400\">share purchase<\/span><\/a><span style=\"font-weight: 400\"> is riskier because you inherit the business as-is, including any hidden or undisclosed liabilities.&nbsp;<\/span><\/p>\n\n\n\n<div class=\"box box--icon box--info\">\n<p><span style=\"font-weight: 400\">That said, the general principles are the same. In all cases, DD exists to provide insight so that the buyer can fully understand the company&#8217;s value. Likewise, DD helps the buyer determine if it wants to complete the acquisition on the preliminary terms negotiated before the purchase agreement is finalised.&nbsp;<\/span><\/p>\n<\/div>\n\n\n\n<p><span style=\"font-weight: 400\">Depending on the outcome of DD, the buyer will either:<\/span><\/p>\n\n\n\n<ul class=\"wp-block-list\"><li style=\"font-weight: 400\"><span style=\"font-weight: 400\">agree to acquire the company at a price agreed to under the non-binding heads of term;<\/span><\/li><li style=\"font-weight: 400\"><span style=\"font-weight: 400\">seek to renegotiate the preliminary price to a lower value because the DD uncovered something that makes the business less valuable; or<\/span><\/li><li style=\"font-weight: 400\"><span style=\"font-weight: 400\">walk away from the deal because the DD uncovered liabilities that make the deal commercially unviable.&nbsp;<\/span><\/li><\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><span style=\"font-weight: 400\">Scope of Due Diligence&nbsp;<\/span><\/h2>\n\n\n\n<p><span style=\"font-weight: 400\">As a business involves different aspects, such as operational, financial, and legal elements, there are also different aspects to DD. In general, we can distinguish between:<\/span><\/p>\n\n\n\n<ul class=\"wp-block-list\"><li style=\"font-weight: 400\"><span style=\"font-weight: 400\">strategic due diligence;&nbsp;<\/span><\/li><li style=\"font-weight: 400\"><span style=\"font-weight: 400\">accounting due diligence; and&nbsp;<\/span><\/li><li style=\"font-weight: 400\"><span style=\"font-weight: 400\">legal due diligence.&nbsp;<\/span><\/li><\/ul>\n\n\n\n<p><span style=\"font-weight: 400\">For more complex transactions, different advisors will carry out each aspect of DD. Respectively, these tend to be:<\/span><\/p>\n\n\n\n<ul class=\"wp-block-list\"><li style=\"font-weight: 400\"><span style=\"font-weight: 400\">management consultants and corporate finance professionals;<\/span><\/li><li style=\"font-weight: 400\"><span style=\"font-weight: 400\">accountants; and&nbsp;<\/span><\/li><li style=\"font-weight: 400\"><span style=\"font-weight: 400\">lawyers.&nbsp;<\/span><\/li><\/ul>\n\n\n\n<p><span style=\"font-weight: 400\">In practice, each of these aspects will often overlap with the others. The next section explores each in turn.&nbsp;<\/span><\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span style=\"font-weight: 400\">Strategic Due Diligence<\/span><\/h3>\n\n\n\n<p><span style=\"font-weight: 400\">Generally, a buyer would complete the strategic element of the DD at an earlier stage in the negotiation process. Strategic DD also primarily relies on public information. In essence, the buyer wants to know:<\/span><\/p>\n\n\n\n<ul class=\"wp-block-list\"><li style=\"font-weight: 400\"><span style=\"font-weight: 400\">the market position of the target;&nbsp;<\/span><\/li><li style=\"font-weight: 400\"><span style=\"font-weight: 400\">its financial position; and<\/span><\/li><li style=\"font-weight: 400\"><span style=\"font-weight: 400\">the target\u2019s business plan.&nbsp;<\/span><\/li><\/ul>\n\n\n\n<p><span style=\"font-weight: 400\">As the buyer, your senior management can undertake this directly. You may also wish to appoint business advisers with relevant experience. Additionally, your financial advisers may advise you on this if you are obtaining any outside finance to fund the acquisition.&nbsp;<\/span><\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span style=\"font-weight: 400\">Accounting Due Diligence<\/span><\/h3>\n\n\n\n<p><span style=\"font-weight: 400\">Usually, the buyer will instruct its accountants to investigate the financial and accounting aspects of the company and produce a comprehensive auditor\u2019s report. An accountant will typically require access to private and sensitive information about the target. Therefore, this DD stage typically begins after parties have drafted their <\/span><a href=\"https:\/\/legalvision.co.uk\/commercial-lease-property\/key-provisions-heads-of-terms\/\"><span style=\"font-weight: 400\">heads of term<\/span><\/a><span style=\"font-weight: 400\"> (similar to a non-binding agreement in principle).&nbsp;<\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400\">While the scope of the report depends on the particulars of the target, in general, it will cover:<\/span><\/p>\n\n\n\n<ul class=\"wp-block-list\"><li style=\"font-weight: 400\"><span style=\"font-weight: 400\">an analysis of the target\u2019s market, its position, customers and clients, market share, and main competitors;&nbsp;<\/span><\/li><li style=\"font-weight: 400\"><span style=\"font-weight: 400\">the target\u2019s pricing policy and any terms of trade, credit agreements, debt financing, and supplier agreements;&nbsp;<\/span><\/li><li style=\"font-weight: 400\"><span style=\"font-weight: 400\">the extent of the target\u2019s tax liabilities and ability to meet these liabilities when they come due;&nbsp;<\/span><\/li><li style=\"font-weight: 400\"><span style=\"font-weight: 400\">a detailed account of the target\u2019s profitability, balance sheet strength, and capital structure analysis; and<\/span><\/li><li style=\"font-weight: 400\"><span style=\"font-weight: 400\">information on valuable property such as land and equipment, amongst others.&nbsp;<\/span><\/li><\/ul>\n\n\n\n<p><span style=\"font-weight: 400\">Additionally, the report will seek to identify key information that will be incorporated in the purchase agreement as <\/span><a href=\"https:\/\/legalvision.co.uk\/commercial-contracts\/warranties-and-indemnities\/\"><span style=\"font-weight: 400\">warranties or indemnities<\/span><\/a><span style=\"font-weight: 400\"> by the buyer\u2019s legal team. If this information later turns out to be untrue, this may give the buyer a cause of action against the seller.&nbsp;<\/span><\/p>\n\n\n\n<div class=\"box box--icon box--info\">\n<p><span style=\"font-weight: 400\">Your legal team should liaise with the accountants to ensure they understand the full scope of their report. As the buyer, you may use this report to renegotiate the terms of the purchase price.&nbsp;<\/span><\/p>\n<\/div>\n\n\n\n<h3 class=\"wp-block-heading\"><span style=\"font-weight: 400\">Legal Due Diligence<\/span><\/h3>\n\n\n\n<p><span style=\"font-weight: 400\">The legal aspect of DD has two main purposes, which are to identify:<\/span><\/p>\n\n\n\n<ul class=\"wp-block-list\"><li style=\"font-weight: 400\"><span style=\"font-weight: 400\">any legal conditions that must be satisfied for the purchase to be complete; and<\/span><\/li><li style=\"font-weight: 400\"><span style=\"font-weight: 400\">any legal matters that may impair the target\u2019s value.&nbsp;<\/span><\/li><\/ul>\n\n\n\n<p><span style=\"font-weight: 400\">The legal team will then use this information to draft the purchase agreement. In particular, they will draft warranties and indemnities clauses and conditions precedent. These are the conditions that must be fulfilled for the purchase to be complete.&nbsp;<\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400\">To do this, the buyer\u2019s legal team will investigate several aspects of the company, including:<\/span><\/p>\n\n\n\n<ul class=\"wp-block-list\"><li style=\"font-weight: 400\"><span style=\"font-weight: 400\">the target\u2019s <\/span><a href=\"https:\/\/legalvision.co.uk\/corporations\/company-constitution\/\"><span style=\"font-weight: 400\">constitutional documents<\/span><\/a><span style=\"font-weight: 400\">, which disclose the rights and obligations of the shareholders, directors, and the company itself;&nbsp;<\/span><\/li><li style=\"font-weight: 400\"><span style=\"font-weight: 400\">the directors and shareholders, as this can provide commercial and legal insight into the business;&nbsp;<\/span><\/li><li style=\"font-weight: 400\"><span style=\"font-weight: 400\">any minutes and private registers to gain further insight into the administration and management of the company;&nbsp;<\/span><\/li><li style=\"font-weight: 400\"><span style=\"font-weight: 400\">the company\u2019s accounts, which are particularly relevant when drafting warranties and indemnities;&nbsp;<\/span><\/li><li style=\"font-weight: 400\"><span style=\"font-weight: 400\">any debt financing arrangements along with any security granted over the business\u2019 property, which can give rise to unexpected legal liabilities; and<\/span><\/li><li style=\"font-weight: 400\"><span style=\"font-weight: 400\">all key contracts, which can contain conditions that might arise if the buyer acquires the target and significantly impair the company&#8217;s value, amongst other considerations.&nbsp;<\/span><\/li><\/ul>\n\n\n\n<p><span style=\"font-weight: 400\">Your lawyers would generally compile such information into a report and share this with the buyer\u2019s senior management.&nbsp;<\/span><\/p>\n\n\n\n\n<a href=\"#content-next\"\n   class=\"block p-4 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The information is essential if you wish to renegotiate the purchase price or abandon the transaction altogether.&nbsp;<\/span><span style=\"font-weight: 400\">If the transaction proceeds, the information contained in the reports helps draft the final purchase agreement.&nbsp;<\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400\">As a general legal principle, any information the seller has furnished the buyer (or its advisers) will be treated as true by inserting certain terms in the agreement. However, suppose these later turn out to be misrepresentations or otherwise untrue. In that case, the buyer usually has a right of action against the seller, typically either breach of contract or misrepresentation.&nbsp;<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span style=\"font-weight: 400\">Key Takeaways&nbsp;<\/span><\/h2>\n\n\n\n<p><span style=\"font-weight: 400\">The buyer undertakes due diligence before the parties to the transaction agree to the final terms of the purchase agreement. The buyer will usually appoint strategic, financial and legal advisers to undertake independent investigations into the target business. These advisers will examine all aspects of the business to determine whether to renegotiate the sale price or abandon the transaction.&nbsp;<\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400\">If a buyer does not conduct a thorough due diligence process, any liabilities uncovered after the fact will be the buyer&#8217;s fault. On the other hand, if the buyer undertakes a thorough DD and the seller does not properly disclose the right information, the buyer may be entitled to make a claim against the seller.&nbsp;<\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400\">If you need help with a business transaction, our experienced <\/span><a href=\"https:\/\/legalvision.co.uk\/business-sale-purchase-lawyers-lp\"><span style=\"font-weight: 400\">business sale and purchase lawyers<\/span><\/a><span style=\"font-weight: 400\"> can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on <a href=\"tel:+448081968584\" class=\"AVANSERnumber dynamic-number\">0808 196 8584<\/a> or visit our<\/span>&nbsp;<a href=\"https:\/\/legalvision.co.uk\/membership\"><span style=\"font-weight: 400\">membership page<\/span><\/a><span style=\"font-weight: 400\">.<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span style=\"font-weight: 400\">Frequently Asked Questions&nbsp;<\/span><\/h2>\n\n\n\n<div class=\"schema-faq wp-block-yoast-faq-block\"><div class=\"schema-faq-section\" id=\"faq-question-1656472183723\"><strong class=\"schema-faq-question\"><strong>What is due diligence?<\/strong><\/strong> <p class=\"schema-faq-answer\">If you intend to acquire a company, you will want to investigate it as thoroughly as possible by looking at its strategic, financial, and legal position. This investigation process is known as due diligence.<\/p> <\/div> <div class=\"schema-faq-section\" id=\"faq-question-1656472198193\"><strong class=\"schema-faq-question\"><strong>Why does the buyer need to undertake due diligence?<\/strong><\/strong> <p class=\"schema-faq-answer\">Absent fraud or misrepresentation, the buyer takes a business (or its assets) as is. This means they cannot claim against the seller if the business later turns out to be worth far less because they did not ask the right questions. Due diligence is the most effective way for a buyer to ensure they have the fullest insight into the target possible so they can offer the most accurate price.\u00a0<\/p> <\/div> <\/div>\n<div class=\"not-prose m-feedback-prompt\">\n    <!-- Thumbs up\/down bar -->\n    <div class=\"m-feedback-prompt__main\">\n        <div class=\"m-feedback-prompt__title\">Was this article helpful?<\/div>\n        <div>\n            <!--span class=\"m-feedback-prompt__button--text\">Thanks!<\/span-->\n            <button type=\"button\" class=\"m-feedback-prompt__button m-feedback-prompt__button--yes\"\n                    data-analytics-link=\"feedback-prompt:yes\" aria-label=\"Agree\">\n                <i class=\"fa-regular fa-thumbs-up fa-3x\"><\/i>\n            <\/button>\n            <button type=\"button\" class=\"m-feedback-prompt__button m-feedback-prompt__button--no\"\n                    data-analytics-link=\"feedback-prompt:no\" aria-label=\"Disagree\">\n                <i class=\"fa-regular fa-thumbs-down fa-3x\"><\/i>\n            <\/button>\n        <\/div>\n    <\/div>\n\n    <!-- Feedback form -->\n    <div class=\"m-feedback-prompt__form\">\n        <div class=\"m-feedback-prompt__form--thanks \">\n            <div>Thanks!<\/div>\n            <p>\n                We appreciate your feedback \u2013 your submission has been successfully received.            <\/p>\n        <\/div>\n        <form id=\"contact-form\" class=\"m-feedback-prompt__form--form\" action=\"\" method=\"post\">\n            <input type=\"hidden\" id=\"authenticity_token\" name=\"authenticity_token\" value=\"9eb4f72322\" \/><input type=\"hidden\" name=\"_wp_http_referer\" value=\"\/api\/wp\/v2\/posts\/4574\" \/>            <input value=\"https:\/\/legalvision.co.uk\/business-sale-purchase\/due-diligence-business-purchase\/\" type=\"hidden\" name=\"currenturl\"\n                   id=\"currenturl\">\n            <input value=\"Due Diligence in a Business Purchase in England\" type=\"hidden\" name=\"currenttitle\"\n                   id=\"currenttitle\">\n            <label>\n                <!-- display on thumbs-up -->\n                <span class=\"m-feedback-prompt__feedback m-feedback-prompt__feedback--yes\">\n                    Can you tell us <span class=\"font-semibold\">why<\/span> you found it helpful?\n                <\/span>\n\n                <!-- display on thumbs-down -->\n                <span class=\"m-feedback-prompt__feedback m-feedback-prompt__feedback--no text-lg\">\n                    How can we better improve this article?\n                <\/span>\n                <textarea name=\"feedbackmessage\" id=\"feedbackmessage\" required><\/textarea>\n            <\/label>\n\n            <div class=\"m-feedback-prompt__form--error\" id=\"form-submit-error\"><\/div>\n            <button id=\"submit-contact-form-button\" type=\"submit\" name=\"commit\" class=\"m-feedback-prompt__form--submit\"\n                    data-analytics-link=\"feedback-prompt:submit\">\n                Submit            <\/button>\n        <\/form>\n    <\/div>\n<\/div>\n","protected":false},"excerpt":{"rendered":"<p>English law operates under the principle of caveat emptor, meaning that the buyer takes the business as is. Accordingly, if you finalise the transaction and discover some defect in the value of the business, you will not have any recourse against the seller. The only exception is if there is a term in the purchase<a href=\"https:\/\/legalvision.co.uk\/business-sale-purchase\/due-diligence-business-purchase\/\">Continue reading <span class=\"sr-only\">&#8220;Due Diligence in a Business Purchase in England&#8221;<\/span><\/a><\/p>\n","protected":false},"author":13461,"featured_media":3170,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"_relevanssi_hide_post":"","_relevanssi_hide_content":"","_relevanssi_pin_for_all":"","_relevanssi_pin_keywords":"","_relevanssi_unpin_keywords":"","_relevanssi_related_keywords":"","_relevanssi_related_include_ids":"","_relevanssi_related_exclude_ids":"","_relevanssi_related_no_append":"","_relevanssi_related_not_related":"","_relevanssi_related_posts":"2720,1264,4394,1161,2862,1370","_relevanssi_noindex_reason":"","editor_notices":[],"footnotes":""},"categories":[29],"tags":[49,90,168,223,293,834],"class_list":["post-4574","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-business-sale-purchase","tag-warranties","tag-company","tag-due-diligence","tag-large-business","tag-business-purchase","tag-business-sale"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.1.1 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Due Diligence in a Business Purchase in England | LegalVision UK<\/title>\n<meta name=\"description\" content=\"Conducting due diligence in a business purchase is essential. 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