Are you thinking about starting your journey into business ownership? Or are you looking at acquiring another business to expand your existing one? Wishing to add another product to your product line? If you answered yes to any of these questions, you need to know about the due diligence process and how it can better inform your purchasing decisions.
What is Due Diligence?
Put simply, due diligence is an investigation into the business or product being purchased. The purchaser will usually conduct their due diligence investigation prior to completion of the purchase to verify if the acquisition is indeed ‘worth it’. Before committing to the transaction, the purchaser will want to ensure that it knows what it is buying and what obligations it is assuming, the nature and extent of the target business or product’s contingent liabilities, problematic contracts, litigation risks, intellectual property issues and much more.
Due Diligence from a purchaser’s perspective
Due diligence allows the purchaser to feel more comfortable that his or her expectations regarding the transaction are correct. In any transaction purchasing a business without doing due diligence substantially increases the risk to the purchaser.
Due Diligence from a vendor’s perspective
Due diligence is conducted to provide the purchaser with confidence. However, sometimes Vendors carry out a “vendor due diligence” prior to sale. This is common in competitive bid processes, where the Vendor undertakes this exercise to encourage purchasers to make bids [by lessening the need for purchasers to conduct their own due diligence]. This exercise may also benefit the Vendor, as a closer financial examination of the business or product may reveal that the fair market value is more than what was initially thought to be the case.
So, what is involved?
When conducting the due diligence, you will usually look at key issues of the business or product, including profits, financial risks, legal issues and potential deal-breakers. This article will delve deeper into what a Legal Due Diligence looks like.
Legal Due Diligence
The purpose of a legal due diligence is to enable an intending purchaser to assess the legal risks associated either with a business or a product, in order to make an informed decision as to whether they will proceed with the transaction and, if so, on what terms.
What are the main items and issues that might be covered in a legal due diligence?
This will all depend on the nature of the transactions i.e. whether the purchaser is purchasing a business, purchasing the assets of the business, or whether they are purchasing the shares in a company that owns the business and assets.
If purchasing the business, the due diligence questions will usually be focused on the assets being transferred, rather than the liabilities. Other than employee liabilities, the business liabilities usually will not be transferred across to the purchaser as part of the sale.
Alternatively, if purchasing all the shares in a company, the purchaser acquires all the assets together with all the liabilities as they exist. In that case, the legal due diligence will be more comprehensive as it will need to consider the liability side as well.
General Advice Disclaimer
Information provided on this website is general in nature and does not constitute financial or legal advice. Every effort has been made to ensure that the information provided is accurate, but information may become outdated as legislation and new government announcements are made. Individuals must not rely on this information to make a financial, investment or legal decision as it does not take into account their personal circumstance. Before making any decision, we recommend you consult a licensed adviser or legal practitioner to take into account your particular objectives, circumstances and individual needs.