Our Take Five Guides throw out the jargon and provide you with concise legal advice direct from our lawyers, in five simple steps.
This is an audit process undertaken by a buyer of a business, to enable them to get a full knowledge of the business before they commit to an acquisition. When considering buying a business, it’s important to find out as much information about the company as possible to protect your investment. Similarly, if you are considering selling a business, it’s important to disclose information fully and accurately, to limit your future liability to the buyer
Crucially to carry out full legal and financial due diligence prior to investing. This provides you with insight about the business’s financial stability and any liabilities that come with it. It is particularly important to consider the following:
A seller usually provides the buyer with warranties about the status and history of the business. These are true statements covering a range of issues relating to the company providing the buyer with an element of comfort. If the warranties prove to be untrue the buyer can bring a claim against the seller for breach of contract.
However, it’s still important to carry out a full due diligence exercise so that, if necessary, any issues can be identified and actions taken prior to the sale, such as negotiating a price reduction, asking for an indemnity about a specific issue that has arisen, or the complete withdrawal from the acquisition because the company may not be as viable as it previously seemed.
This letter is an important document for both the seller and the buyer. It provides an opportunity for the seller to disclose any facts that contradict the warranties. If, after completion, the buyer attempts to bring a claim that a warranty is untrue, if the seller has fairly disclosed information in the disclosure letter, then the buyer will have no claim. For the buyer, a disclosure letter is important because it can alert them to possible issues they may inherit, before they are committed to the sale – allowing the buyer to seek a price negotiation if necessary.
Any potential buyer will scrutinise your business via due diligence, so it is advisable to ensure all relevant paperwork is available and up to date. This includes:
Making sure these are all in order gives a great first impression to a buyer about the organisation of your business and the way it is run.
Would you like to know more?
Please contact one of our expert lawyers in this sector.
You can download a PDF version of this guide.