Legal Due Diligence: Understanding The Process

If you’re considering purchasing a business, you’ve likely come across the term ‘due diligence’.

Due diligence is a critical process for potential business buyers to research and evaluate a business before finalising a Business Sale Agreement.

Conducting due diligence on a business before acquisition is crucial.

This ensures that there are no concealed details about the business that could adversely affect you once you assume ownership.

What Does Due Diligence Involve?

Legal Due Diligence involves thorough research to uncover all the facts about a business’s structure and operations.

This includes identifying both its assets and liabilities.

It’s important to be vigilant for sellers who may not disclose critical information such as the reason for the sale, leases, licences, permits, and employment contracts.

Generally, due diligence encompasses 3 main types of research on a business:

1. Financial
2. Intellectual property
3. Operational

Within these categories, some key considerations include:

• Pending litigation
• Outstanding debts
• Negative customer feedback and complaints
• Exaggeration of cash transactions
• Whether the business has reduced the price of their products and services to inflate gross sales figures

Being aware of these factors is essential before you sign a Business Sale Agreement. You wouldn’t want to inherit the business’s problems once you take over.

Why Should I Conduct Due Diligence?

Through the due diligence process, you will gain a comprehensive understanding of the benefits and risks associated with the business before you commit to the purchase.

It’s akin to buying a car: you’d want an independent mechanic to inspect the vehicle to ensure it’s in good working order before making the purchase.

It’s advisable to undertake due diligence as early as possible. This is because you cannot hold the seller accountable later if you didn’t perform these checks yourself.

If you discover potential liabilities during due diligence, these can be leveraged in negotiations with the seller. You might be able to negotiate a lower purchase price if you are willing to assume these liabilities.

To learn more about your rights during the business sale process and at what point you can withdraw, have a look at this article we’ve prepared.

How Do I Conduct Due Diligence?

Legal due diligence can be complex and time-consuming, depending on the nature of the business you’re looking to buy.

If you require a comprehensive background check on the business, it’s important to consult with experts. They possess the necessary expertise to ensure you are fully informed about the business.

Typically, financial and legal professionals are best equipped to advise you on what to examine.

A proficient lawyer will also ensure you are cognisant of all business aspects, enabling you to make an informed decision before you commit to the purchase.

What To Take Away…

Conducting legal due diligence is a vital step before you sign a Business Sale Agreement.

If you’re contemplating buying a business and need assistance with understanding where to start and how to conduct legal due diligence, our expert lawyers are here to support you. We can also guide you through other aspects of the business purchase process.

Our experienced team can be reached on 0800 002 184 or [email protected] for a free, no-obligations consult.

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