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Due diligence - buyers and sellers

Anyone who is thinking of acquiring a business or a company, purchasing shares or assets needs to undertake an audit of the affairs and financial health of the target in question.

This investigative process is referred to as due diligence and it will identify any areas of risk. Potential investors are able to appraise the potential purchase and review important factors such as its contracts, expenses and any claims. It is about getting a full picture of how the target is run, its financial pressures and the state of the accounts.

The due diligence process usually starts following a deal being agreed. Initially, the potential buyer sends enquiries to the seller, which require a response. The enquiries can go backwards and forwards a number of times with additional information requested. During this phase, lawyers and accountants will get involved to support and advise their clients.

It is the opportunity to get any issues out in the open so the buyer is fully aware of the current status and any liabilities. It is vital to be honest in response to the enquiries as, ultimately, the information provided will create the warranties and indemnities – in other words, a guarantee – that the seller has disclosed everything which may affect the buyer once a transaction is completed.

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What the buyer needs to do - due diligence

The buyer needs to research the target and find answers to important questions such as why is the entity for sale and is it still profitable? They need to identify potential issues such as employee claims, financial matters or undisclosed assets.

Often, buyers underestimate the importance and demands of this part of the due diligence process. As a buyer you need robust evidence to judge the integrity of the intended purchase.

What the seller needs to do - due diligence

During due diligence the seller will need to consult a professional to assist in responding to the enquiries made by the buyer. Clear guidance is required on making full and frank disclosures about specific issues.

The seller can face an overwhelming stream of enquiries and has to deal with them fully and accurately as the responses are relied upon in the agreement as a whole.

The enquiries form the basis of the disclosure letter and so having professional advice will help in the negotiation process and protect the interests of the seller.

Being honest at this stage is vital to avoid potential claims by the buyer at a later date.

Our corporate lawyers have a strong track record of successfully assisting both buyers and sellers with due diligence. Stephensons will assist you in securing the outcome you desire. If you would like to speak with one of our experienced corporate lawyers today please call us on 01616 966 229.

 

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