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Due Diligence When Buying a Business

Introduction

In simple terms, “due diligence” is an investigative process prior to buying a business. Conducting due diligence gives you comfort that you know what you are buying and enables you to assess the value of the business and the risks associated with buying it. You look at the business’ operations, financial performance, legal and tax compliance, customer contracts, intellectual property, assets etc, often within a time period specified in a letter of intent.

You usually conduct due diligence after you and the seller have agreed in principle to a deal but before signing a binding contract.

Conducting Due Diligence

You should consider gathering and reviewing the following:

  1. Information about the company’s business, structure and practices, including:

  2. the company’s Memorandum & Articles of Association, names of board members, board meeting minutes, names of shareholders, a list of all the countries where the company does business and an organisation chart;

  3. annual reports, tax filings, management accounts, the general ledger, accounts payable and receivable etc;

  4. licenses and permits;

  5. Assets/liabilities inventory:You want to know the value of all assets/liabilities to help determine the appropriate price to pay. Tangible assets might include property, manufacturing equipment, office equipment and supplies, stock, work-in-progress and raw materials. Intangible assets might include goodwill and other intellectual property;

  6. Contracts:When you buy a business, you may have to fulfil contracts signed before you purchased the business. You should look at all agreements including those relating to sales, purchase, employment, equipment/property leases, mortgages, insurance, subcontractors etc;

  7. Personnel records, including:

  8. staff handbook;

  9. salaries, benefits and bonuses;

  10. any employment disputes, terminations, claims etc;

  11. Information/documents on any pending, threatened or historical litigation;

  12. Insurance policies/claims;

  13. Existing products and services and those that are under development: For example, testing data, warranty claims, complaints, regulatory compliance letters, engineering reports, customer feedback and surveys, patents, trade secrets etc.

This should not be relied upon for legal advice. If you would like any further information or advice please email richard@clariclegal.co.uk.

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