Buying a business can be a great opportunity but there is also plenty of opportunity for the buyer to be burnt. While there are never any 100% guarantees you will end up buying the business that you think you are, conducting thorough due diligence will minimize the risk of a potentially costly error of judgement. If you are an experienced business owner and/or have acquired other companies in the past, you may feel confident that you know what to look at and can conduct suitable due diligence by yourself, with the help of relevant experts where required. However, it is often better to employ the services of a company who are specialists in due diligence, especially if the financial outlay on the acquisition is considerable, as it most likely will be. Every industry and company has its own specifics and unless you are supremely confident you know every stone that needs to be looked under through a due diligence procedure it is usually better to be safe than sorry.
Nonetheless, here is a general checklist covering the main areas that most due diligence procedures will cover:
Company Administration and Status of Good Standing
This includes all of a company’s papers of registration with national and local government departments, including HMRC. You will need to make sure you have verified the company’s Articles of Incorporation and all subsequent amendments. Are the company’s minutes up to date and do you have all historical resolutions of the directors and shareholders? You will need a list of all shareholders, their holding and a copy of the company’s shareholders’ agreement. Details and documentation of any outstanding options or any other agreements that could lead to future claims on ownership stakes in the company or claims against the company must be acquired.
Finances and Accounting
You will need to ensure that you have full access to all of the company’s accounts and financial documentation. This should come with the company Auditor’s reports and you will almost certainly wish to invest in having your own Auditor reconfirm things. Full information on debts, taxation due or pending and a full credit report is also crucial.
Assets including Real Estate
A full list of assets and their location is necessary. You will also have to assess independently that the current value of these assets is equal to that which the company’s current ownership has put against them. Full information on any assets under leasing is also necessary as well as an independent valuation of any real estate owned, title deeds and other relevant documentation.
If the company owns any patents, pending patents, trademarks or copyrights, access to all relevant paperwork is crucial. Particular attention should be given to the expiry date of any intellectual property, where relevant, and its geographical jurisdiction.
Employees and Employee Benefits
One of the most important areas to assess is what the obligations to the company’s current and past employees are and will be in the future. What kind of contracts are they on and what is the future financial commitment? What impact does the structure of legal obligations to employees have on potential restructuring plans and the ability to make changes in the future?
Does the company have any ongoing litigation procedures either initiated by the company or against the company? You will have to perform a background check in all of the jurisdictions that the company has a presence or operations in, including export markets, to ensure there are no existing legal disputes that you are not aware of.
Note: This article should not be considered as legal advice. If you are considering buying a business, you are advised to seek the services of a professional company, such as Elemental CoSec; a London-based company that offers a full range of corporate services which include corporate legal, accountancy and tax, process agent and company secretarial services.