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What is due diligence?

When committing to the acquisition of assets or shares in a company, it is important to ensure you have undertaken a full investigation so that any hidden liabilities, losses or other problems which may become your responsibility after the acquisition has taken place, have been discovered as soon as possible.

Due diligence
will involve the investigation of various aspects of a company such as
employment, health & safety, commercial and tax.

In an
acquisition, due diligence is undertaken prior to the share purchase agreement
or asset purchase agreement being entered into. 
If any issues are discovered during this process, the buyer can decide
not to proceed with the transaction or can use this as a negotiating tool.

If an issue only
comes to light after completion of a transaction, whilst the buyer may be able
to claim against the seller for a breach of warranty, this process is time
consuming and expensive.  It is therefore
advisable to request as much information as possible during the due diligence
process in order to ensure the buyer is fully aware of any issues prior to
completion.

The due
diligence process

The buyer’s
solicitor will send a set of questions to the seller’s solicitor in order to obtain
as much information as possible.  The
buyer’s solicitor will then review the information they have been provided with
and will raise further questions if needed. The information received will form
the basis for their due diligence report. 
  

The due
diligence report aims to advise the buyer of any risks involved in the
acquisition by setting out key issues and how these can be resolved prior to
completion of the transaction.

Virtual data
rooms

When providing the
requested information, it is common for the seller to upload this information
to a virtual data room.   This data room allows
each party to login and have access to the various documents that have been provided
in relation to the transaction.  This
makes it easier and quicker to locate documents and to know which documents
have already been provided.

Whilst the due diligence process will take up a lot of the seller’s time
it is extremely important for the buyer in order to help them assess the risks
involved with any issues as soon as possible.

If
you have any questions, please get in touch with me or anyone else within the
Corporate Commercial team on 01256 320555.

Liberty
Roberts

Corporate
Commercial Solicitor

lroberts@clarkeandson.co.uk

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