What is due diligence in a business sale?

Due diligence is the name for the process in a company sale or purchase where the proposed buyer investigates the company’s business, people, records and key documents. This usually takes the form of a questionnaire asking detailed questions about accounts and tax matters and trading history.

Why is it necessary?

Due diligence is not a legal requirement – the buyer does not have to investigate the business it is buying for it to be legally binding. However, due diligence allows a buyer the opportunity to investigate the company in more detail to ensure that it is a viable business. It should also highlight any risks of the purchase and find any skeletons hiding in the closet.

The due diligence starts with the buyer’s solicitor sending a due diligence questionnaire to the seller’s solicitor. This usually happens after the parties have agreed a deal in principle, but before the sale contract is drafted. The buyer and seller may have already drafted a heads of terms and may have already signed a Confidentiality Agreement (also called a Non-Disclosure Agreement) before the seller starts to share sensitive information about is key customers, suppliers, and finances.

The seller will provide answers and documents in response to the buyer’s questions. After the initial answers, further enquiries are often raised until the buyer is satisfied that it is happy to continue with the company purchase. Sometimes, a buyer will decided not to proceed with the purchase after the due diligence stage – and this is usually due to a lack of information being provided by the seller or worrying information being disclosed.

What areas of the business do the due diligence questions cover?

Contracts

Employees

Property

Regulatory and compliance

Equipment

Insurance

Litigation and disputes