Selling your Business – Due Diligence

So you’ve found a buyer and agreed Heads of Terms, now it’s time for the hard work to begin! From my experience, the most commonly underestimated work-load in the transaction is legal due diligence enquiries. Accounting and Commercial due diligence often starts at the Heads of Terms stage as the buyer uses basic enquiries and a combination of assumptions to reach a price they are willing to pay in principle. However, before actually proceeding they will want to know everything about how your business operates.

What questions are they likely to ask?

Legal due diligence will vary depending on the nature of the business, size of the transaction and how the deal is structured (there is usually reduced due diligence for a business purchase as compared to a share purchase, but this isn’t always the case). Typically, legal due diligence covers the following topics:

1. Corporate Structure and Records – this is the background to your company, how it is set up and managed, what it’s governing documents consist of and compliance with statutory registers and records.
2. Share Capital and Shareholders – this is crucial in a share transaction and will enquire into who actually owns the shares being sold and any matters that may impact those shares.
3. Accounts and reports – this covers the Company’s historic statutory accounts, practices and management accounts since the last statutory accounts. It also considers any forecasting or budgets and changes since the last accounts date.
4. Finance and Banking – this is designed to gather information in relation to the financial facilities available to the business or needed to operate it (e.g. credit cards, overdrafts, grants, long-term loans, invoicing or other facilities) and even without any of these at the very least the bank accounts the business uses and cash in the bank.
5. Business, contracts and trading – this section is fundamental in any transaction as it covers the contractual arrangements that the business has and needs to trade. Crucially, a buyer needs to know about any material contracts and ensure these will continue.
6. Assets – this covers the equipment, plant and machinery the business needs to operate. It can also extend to stock levels.
7. Real Property – this covers the premises used to operate the business from and captures information regarding leasehold and freehold interests. It is common for this to extend not only to basic questions to understand what there is but appropriate Commercial Property Standard Enquiries (CPSE’s) in relation to those premises.
8. Intellectual property – this covers what intellectual property is used by the business, who owns it and any licences required.
9. Information Technology – this covers the computer systems used in the business, their maintenance and any vulnerabilities. This has become particularly crucial in recent years with the growth of cyber-attacks.
10. Data Protection and privacy – this is geared at compliance with strict statutory obligations in relation to how personal data is stored and processed. Particularly in view of the changes in GDPR!
11. Insurance – the buyer needs to ensure adequate insurance, the types of claims historically brought and any residual issues they may inherit
12. Regulatory compliance and consents – this is more key in businesses which are subject to a regulatory authority. For example those subject to FCA authorisation or SRA Registration. But this can also cover Premises Licences and Waste Carrier Licences. In effect, any governmental authority or consents required to run the business.
13. Litigation – any buyer will want to know about litigation that has been issues and which could impact the target they are acquiring.
14. Employment – employment law is a very niche topic and there are a whole host of laws which apply when you engage employees and these questions are designed to understand not only what employees are needed to run the business, but also ensure compliance with all laws. This can be particularly key in a business sale where ‘TUPE’ applies. If you want to know more about this, do contact our employment team who would be happy to help!
15. Retirement Benefits – just as employment law needs to be covered in view of the legal requirements to provide a pension scheme and auto-enrolment obligations any buyer needs to fully understand what has been effected and what their ongoing liabilities may be
16. Environment, Health and Safety – it is important for a buyer to understand about what health and safety procedures you have in place and environmental factors which may impact the business. In particular, what environmental and health and safety laws apply to the type of business they are acquiring and how they have been complied with. From cleaning products to storage of sewage tanks, the buyer will want to know what impact these have on your business.
17. Anti-Bribery and Corruption – There is strict legislation in place around bribery offences therefore a buyer will want to know what measures you have taken to prevent this.
18. Tax – compliance with tax legislation is important to any business and the buyer will want to understand not only how this has been dealt with historically, but the taxes due and any exemptions that have been applied. For example, capital allowances that have been claimed, some services or supplies are VAT exempt or sometimes R&D claims have been applied for. They will want to know this.

Who is involved in this process?

Primarily, you will be heavily involved in this process as you, together with your staff and managers, will know how the business operates and be gathering this information. Some of it, your accountant may also be able to assist with and we would work with you to manage the disclosure process.

How to manage this process?

Managing the due diligence process is daunting – particularly when you are trying to sell your business without any third parties (particularly staff, suppliers and customers) finding out about the transaction. This can therefore be one of the most stressful parts of a transaction. Technology can help with the provision of secured data rooms which makes it easier for information gathering and sharing but at the end of the day there is always going to be a fair bit of leg-work on your part! This can however be made easier if you plan to sell in advance of having a buyer lined up. We do offer a service where we can work with you to undertake this process with you before your buyer comes on board. This enables you to undertake due diligence at a manageable pace with less pressure. It also gives us the chance to review responses and advise on any potential issues we identify so that they can be rectified before you have a buyer. For instance, many companies don’t maintain statutory books which is a fundamental legal requirement and could cause an issue with your buyer.

For more information on our legal due diligence audit service and how we can help you prepare for a sale, please contact Holly Threlfall or the team on 01604 828282 / 01908 660966 or email info@franklins-sols.co.uk

What next?

Now we move on to preparing the documentation.