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Due Diligence? What happened to Buyer Beware?



Your Heads of Terms are signed, and the main terms of the deal are now agreed in principle “subject to due diligence”. What does this mean exactly?

Before committing to a purchase, a buyer will want to see exactly what it is they are buying. Similar to a residential property purchase, a potential buyer will want to have a look around, ask any questions of the seller and arrange for a valuation before signing on the dotted line. The same applies to buying a business. A price has been agreed but, due diligence will confirm to the purchaser the value of your business based on: (1) whether there are any potential risks or liabilities; and (2) the extent and future prospects of the target business post-sale.

What will the Buyer want to know about my business?The extensiveness of the due diligence process will depend on the size and shape of the transaction and target. The ‘Due Diligence Questionnaire’ is the key document which aims to solicit information from the seller. This list of enquiries helps the buyer to establish whether the target business is in good standing and allows them to gain confidence in the purchase.

Some typical questions…1. Corporate StructureA buyer will want to ensure the seller has good title to the shares or assets being sold and that those shares and assets can transfer freely without any restrictions. The buyer will want visibility on the shareholders and group structure.

2. Accounts and FinanceHere, the buyer will be looking to confirm that the the price is right. An analysis of the company’s accounting records and finance arrangements will reveal how the company is performing financially and will show whether the seller’s projections for the future are realistic.

3. LitigationIf the business has been involved in any litigation or disputes, the buyer will not want to be on the hook for any potential future liability. Is there adequate insurance cover in place to cover the cost of any live disputes?

4. ComplianceHas the business complied with all of its policies, procedures and regulations (both internal and external)?

5. ContractsThe buyer will want to review any key contracts to ensure they will be secured post-sale. Enforceability of key contracts can add value to your business on sale.

6. EmployeesDo you have appropriate contracts in place for your workers, employees and consultants? Did you comply properly with furlough requirements?

7. PropertyThe buyer will want to see that you have good title to any property owned by the business or that any lease arrangements are well documented and free from restrictions such as landlord consent.

8. TaxIs your company tax compliant and have you filed your tax returns? Is there any potential tax liability?

9. Intellectual PropertyYou should ensure and provide evidence to show that your intellectual property is protected and registered.

10. Cyber Security & Data Privacy

It is becoming increasingly important to ensure that you have the appropriate infrastructure in place to prevent any potential attacks and the buyer will want evidence of this, particularly if you operate in an industry which is at an increased risk. Has the business ever been the target of a cyber-attack? What impact did it have on your business and did you take steps to prevent further attacks in the future?

I have all this information to hand can I just do it myself?As the business owner, you will likely hold all the required knowledge and information in-house so it can be tempting to cut the costs and liaise with the buyer directly. However, a risk averse buyer will mean a more laborious process. There are benefits in having your legal team act as the middleman:

  • The questionnaire is constantly updated with fresh enquiries as the buyer begins to learn more about the business.
  • Information needs to be provided in a well organised and well-presented manner to ensure the buyer has easy access.
  • Lawyers are familiar with the kind of risks the buyer will be looking out for.
  • If unrepresented, you may find that the buyer’s lawyer takes advantage of you by inducing you to give legal assurances that you really should not give at this stage in the transaction and that could leave you open to claims later.

Allowing your legal team to manage the process will minimise the disruption to you and your business, will protect you in the sale process and will enable you to maximise your sale potential.

What are the benefits for the seller?It can be tempting to gloss over the list of enquiries in an attempt to speed up the sale. If there are any issues with the business, the buyer is likely to find them (whether this be pre- or post-sale) so it is important to give upfront and detailed responses to avoid any potential liability. Getting your house in order at an early stage can prepare you for sale as you and your legal team will identify aspects of your business that might require attention. Good due diligence is sure to give you and your legal team a head start when it comes to negotiating the wider transaction.

Need more help?

If you would like any help and advice on your proposed sale and primary steps of due diligence please contact our specialist corporate team on 0151 305 9650 or email

Please note this article is not to be interpreted by the reader as advice.

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