I am Selling My Business. What is the Due Diligence Process?

If you are selling your business, you will likely come across the phrase ‘due diligence’. Due diligence is the process a buyer will undertake to investigate your company’s legal and financial position before purchasing your business. While the buyer will likely conduct most of the due diligence, you should be prepared to respond to their requests for information. This article will explain the key components of the due diligence process to better prepare to complete your mergers and acquisitions (M&A) transaction.

Due Diligence

In an M&A transaction, due diligence generally refers to the process the buyer takes to investigate the target company’s: 

• assets;
• liabilities;
• profitability;
• cash flow;
• internal policies;
• reputation;
• corporate governance; and
• regulatory compliance.  

Nevertheless, a successful and efficient due diligence process requires smooth communication between the buyer and seller. Therefore, if you are selling your business, you should familiarise yourself with the process and anticipate as much as possible.  

Purpose of Due Diligence

Acquiring a company through an M&A transaction can be a complex, expensive, and challenging task for a buyer. Therefore, the due diligence process is a critical step in a transaction because it ensures the buyer can:

• accurately value your company; and 
• limit their future financial and legal liability if the purchase goes ahead.

Valuing the Company 

Before a buyer commits to purchasing your company, they will want the complete picture of its performance. For instance, the buyer may know that the company is an industry leader in manufacturing and selling quality women’s watches. The buyer can inspect Companies House and get a general sense of the company’s value based on publicly available information. However, this alone will not likely give the buyer the complete picture it needs to commit to acquiring the company for a substantial sum of money.

Due Diligence Guide for Buying a UK Business

This guide will walk you through the due diligence process when purchasing a UK business.

Download Now

To complete the picture, the buyer must comb through important documents and assemble the correct information about the company’s financial and legal position. Accordingly, the target company will likely have thousands of records the buyer may wish to inspect. However, most of the information will not be public. Nevertheless, the buyer can fully understand your company’s worth by accessing important financial and legal information. 

Limiting Liability 

Buyers generally acquire businesses as they find it. This is known as ‘caveat emptor‘, or buyer beware. That is to say, if defects make your company less valuable, the buyer will not have any recourse against you outside of the terms of the purchase agreement.

Questions to Expect

Every transaction is different, so you can never predict the exact questions and information a buyer will request. However, there are specific key issues you can always expect to be asked and should prepare for.

Unsurprisingly, a buyer or investor will want to see detailed financial information about your business. This might include details such as your balance sheet, P&L accounts, tax returns, management accounts, future financial projections, and details of all outstanding loans and credit facilities. 

Other aspects of your business that you may be asked to provide include:

• team members and structure;
• operations and processes;
• growth strategy and plans;
• key clients, contracts and relationships; and
• corporate structure.

Key Takeaways

For these reasons, a thorough due diligence process ensures that the buyer knows exactly what they are acquiring when they buy your business. For instance, your company could be less valuable if the buyer acquires it and someone decides to sue it. So long as the buyer asks the right questions and you provide honest responses, the buyer will have an accurate sense of any liabilities that could impact the company’s profitability or value in the future. 

If you need help understanding the due diligence process, our experienced corporate lawyers 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 0808 196 8584 or visit our membership page.

Frequently Asked Questions