Business Sale Due Diligence – The Questions Being Asked

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If you are selling your business, due diligence will be a significant part of the sale process.

The buyer and its advisers will want to understand exactly what they are buying and identify any issues which need to be dealt with before completion. This usually involves a fairly lengthy questionnaire covering all aspects of the company.

The number of questions can sometimes take sellers by surprise. Below are some of the main areas you can expect a buyer to focus on.

Corporate Information

This generally covers the company’s shareholders and share capital, previous share issues and transfers, share options, statutory registers, Companies House filings and any shareholder agreements.

Historic company records are not always perfect. If there are gaps or inconsistencies, it is much better to identify and deal with them before the buyer raises them.

Financial Information

Expect to provide annual and management accounts, details of borrowing and information about the company’s assets and liabilities. Anything identified which affects the financial position of the business could ultimately affect the price or the way in which the purchase price is structured.

Customers, Suppliers and Contracts

The buyer will review the company’s key contracts and look at how dependent the business is on particular customers or suppliers.

They will also check termination rights and any unusual or onerous provisions. One important point is whether a contract contains a change of control clause. This could allow the other party to terminate or require consent when the company is sold. If a key contract contains one, you want to know about it well before completion.

Employees

Expect questions about employees, contracts, salaries, bonuses, benefits and pensions, as well as any current or threatened disputes.

Key employees are likely to receive particular attention, especially if the business is heavily reliant on them. The buyer may also look at consultants and contractors who have an important role in the business.

Property

Where the company owns or leases premises, the relevant property documents will need to be provided. For leasehold premises, the buyer will typically look at the lease, rent, service charges and any other documents affecting the property, including whether any consent is required as a result of the sale.

Intellectual Property, IT and Data

The buyer will check that the company actually owns the intellectual property used by the business, including trade marks, domain names, software, designs and copyright. This can cause problems where intellectual property was created by a founder or external contractor but was never formally transferred to the company.

IT systems, software licences, data protection compliance and any previous data breaches or complaints may also be reviewed.

Disputes and Claims

Due diligence is not limited to court proceedings. Buyers will generally ask about threatened claims, employment disputes, significant customer complaints and regulatory investigations as well.

A claim still needs to be considered as part of the due diligence and disclosure process even if you do not consider it to have much merit.

Tax and Regulatory Matters

The buyer and its tax advisers are likely to review corporation tax, VAT, PAYE and National Insurance, together with any HMRC correspondence or enquiries. Depending on the nature of the business, they may also ask about licences, regulatory consents, health and safety and environmental matters.

Why does it matter?

Due diligence can have a direct impact on the deal. If a problem is identified, the buyer may want it resolved before completion, ask for specific protection in the sale agreement or seek to revisit the price.

The best approach is therefore to get ahead of the process. Make sure the company records are up to date, locate the key contracts and identify any historic issues before the buyer starts asking questions. Not every issue is a deal breaker. What matters is identifying it early and being in a position to deal with it.

At BHW Solicitors, our corporate & commercial team advises business owners throughout the sale process, including preparing for and responding to due diligence. If you are thinking about selling your business, please contact us on 0116 289 7000 or email info@bhwsolicitors.com to discuss how we can help.