Due Diligence is the term used to describe the detailed investigation and audit undertaken by the purchaser prior to exchanging contracts.
Once an offer is accepted, the Heads of Terms are drafted. This is a document that provides the basis for the deal.
Legal representation is brought in, if not before. Again, dependent on the process we are running. We work closely with respected legal firms.
This stage of the process can be daunting to clients. A prospective buyer will undertake diligence on all aspects of a company to ensure that there are ‘no skeletons in the cupboard’.
Alongside the lawyers, we prepare a data room. This is a cloud based ‘room’ where all your information is stored for the buyer to review. This ranges from financials, to employee contracts, to legal documentation relating to the business.
We are there every step of the way to prepare this with you. Handholding.
With legal, financial and commercial due diligence being undertaken, the Sale Purchase Agreement is prepared. This is the contract for the sale of your shares.
Once due diligence is finished, Sale Purchase Agreement is agreed, the deal is ready to complete.
Note, the above may seem daunting but it is our role to talk you through every stage.
Traditional due diligence has always focused on legal and financial matters. Over recent years, a broader commercial form of due diligence has evolved and increased in importance.
There is significant crossover between the three broad areas as demonstrated below.
LEGAL Due Diligence
This is broadly about establishing the basic information surrounding the company and the legal status of its relationships with other parties.
The main areas to be covered include:
o Ownership and structure
o Statutory compliance
o Funding facilities and liabilities
o Contractual relationships
o Licensing and compliance
o Intellectual Property
o Employees
o Property
o Insurance
o Employment contracts
o Customer contracts
FINANCIAL Due Diligence
This tends to be historic in focus and is concerned with confirming underlying performance of past financials as a basis for drawing conclusions about the likely achievability of the forecast future performance, together with the current position.
The main areas to be covered include:
o Accounts, policies, systems and management information
o Profit and Loss
o Cash flow cycle
o Overall review of forecasts
o Assets and liabilities, including:
- Land and buildings
- Plant and machinery and other fixed assets
- Investments
- Debtors
- Work in progress
- Cash
- Working Capital
COMMERCIAL Due Diligence
This is designed to look at the strategic position and the company’s competitive position within its sector and industry.
The main areas to be covered include:
o Customer contracts / framework agreements
o Relationships with key customers and suppliers
o Current order book
o Competition in key markets
o Product liabilities and warranties Distribution contracts
o Economic issues
o Social issues
o Market conditions