How to buy or sell a business: step 2 – due diligence
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How to buy or sell a business: Step 2 – due diligence
Due diligence is a key step when it comes to buying or selling a business, and can be very time consuming. Part two of this five-part series will guide you through what due diligence is, why you should do it, and what are some of the key things to look out for.
But this is a five-part series, so be sure to check out the other steps to make sure you know what to expect when buying or selling your business:
Step 1 – Establishing the terms of the deal and confidentiality
Step 2 – Due diligence
Step 4 – Dealing with disclosure
This five-part series is not designed to be exhaustive, and not every step will be suitable for every transaction. It is therefore important to work with experienced advisers who can help guide you through each stage.
Focusing on due diligence…
Step 2 – Doing your due diligence
Due diligence is the process of investigation, verification and assessment by a potential buyer to evaluate and determine the target business’s value, performance and potential risk. It can be a lengthy exercise and will depend on the complexity of the business. Due diligence requires both parties to cooperate and may cover several aspects of the business, including financial, operational, legal and strategic matters.
Why is due diligence important?
Just some of the reasons why due diligence is important because it can:
- Identify risks – Due diligence provides the buyer with an insight to the business’s strengths, weaknesses and opportunities. It should uncover the potential risks and liabilities (reducing the chance of any unpleasant surprises).
- Increases negotiating power – It enables the buyer to make an informed decision about proceeding or renegotiating the terms of the deal.
- Provides transparency – Sellers who engage throughout the process and demonstrate transparency can foster goodwill with the buyer.
What should you be thinking of when performing due diligence?
Every business is different. It is therefore important to seek professional advice to help navigate the complexities of due diligence. However, somethings to consider are:
- How will information be shared? For example, an online data site.
- From the buyer’s perspective: are you asking the right questions? What information is important to you?
- From the seller’s perspective: is there information which needs to be redacted? For example, employee sensitive data (think UK GDPR) or commercially sensitive data such as customer information or supplier details.
What’s next?
Now that we have discussed the importance of due diligence, it’s time to turn our attention to the contract. Be sure to check out part three to find out more about contracts involved when buying or selling a business.
Contact us
If you’re looking to buy or sell a business, Daniel Halls, a solicitor in our Corporate & Commercial team, is here to help you every step of the way. Call Daniel on 01825 744435 or email him at danielhalls@rixandkay.co.uk.
For more information on how Daniel and the Corporate & Commercial team can guide you through your sale or purchase, don’t hesitate to contact us.
