Our Approach
Due Diligence
This is the term used to describe the detailed investigation and audit undertaken by the purchaser prior to exchanging contracts.
When an acceptable offer has been made and we have been instructed by you to accept it, a document is prepared called Heads of Terms (HoT) alternatively known as Heads of Agreement (HoA). This principally, is a mutually agreeable explanation of the deal and among other points provides a timescale (normally a period of exclusivity) for the purchaser to complete their enquiries. It is the document that will be used to draw up a definitive sale and purchase agreement (SPA)*. The contents of which will be subject to a process of Due diligence ensuring that all statements, figures etc that form part of or are particularly relevant to the deal can be independently audited and corroborated.
Negotiation on the SPA will continue at the same time as the purchaser is carrying out their due diligence.
Traditional due diligence has always focused on legal and financial matters. Over recent years however a broader commercial form of due diligence has evolved and increased in importance. There is significant cross over between the three broad areas as demonstrated below.
Areas Considered under these three areas can be set out as follows;
LEGAL Due Diligence
Is broadly about establishing the basic information surrounding the company and the legal status of its relationships with other parties. The main areas to be covered include
- Ownership and structure
- Statutory compliance
- Funding facilities and liabilities
- Contractual relationships
- Licensing and compliance
- Intellectual Property
- Employees
- Property
- Insurance
FINANCIAL Due Diligence
Tends to be historic in focus and is concerned with confirming underlying performance in the past as a basis for drawing conclusions about the likely achievability of the forecast future performance, together with the current position as regards assets and liabilities. The main areas to be covered include;
- Accounts, policies, systems and management information
- Profit and loss
- Cash generation
- Overall review of forecasts
- Assets and liabilities
- Land and buildings
- Plant and machinery and other fixed assets
- Investments
- Debtors
- Stock and work in progress
- Cash
- Information Technology
- Taxation
COMMERCIAL Due Diligence
Is designed to look at the strategic position and the company’s competitive position within its sector and industry. The main areas normally covered include
- Customer contracts/framework agreements
- Relationships with key customers and suppliers
- Current order book (outstanding prospects and proposals)
- Competition in key markets
- Product liabilities and warranties
- Distribution contracts
- Political/legislative impacts
- Economic issues
- Social issues
*The Sales Purchase Agreement (SPA)
Unlike the Heads of Terms (HoT), the SPA is a legally binding agreement which, once signed, sets out the contract for sale, specifying the assets that are sold, the price, the terms of payment, the effective date and the conditions under which the sale will actually be concluded which is usually, but not always simultaneously on exchange of contracts. Normally, to protect the purchaser from agreeing to buy something that is apparently worth £X at one date and completing the sale whatever the effective date is some time later only to find that the business value has declined, any sale agreement relating to a deferred completion date will specify conditions that have to be met for the SPA to be valid at the time of completion, such as no loss of a specified list of key customers, turnover continuing to run at a specified level, or net assets not being below a specified level.
In addition, the SPA will determine the representations, warranties, covenants and indemnities that will define where and how risk lies in the deal with the buyer and the seller. It is over the nature and wording of these areas that much of the discussion in drawing the deal to a conclusion will take place.
The SPA is normally drafted by the buyer’s solicitor, as technically it is an offer to sell by the seller. Given the initial draft is provided in favour of the buyer it should be anticipated to be quite unfavourable to the seller in the way of onerous representations covering, warranties, covenants and indemnities. It should always be remembered that legal advice at this stage is to provide you with knowledge to make a decision on the merits of any issues under discussion.