Blog - Due Diligence on Target Companies

When a company wishes to buy another company, it will often (and advisably so) wish to assess the commercial as well as legal viability of the purchase. To this end, the purchasing company will wish to conduct due diligence on the target company. Due diligence is a process in which a robust assessment is made as to every aspect of the target company, considering legal, regulatory and industry-specific considerations among others. There is no exhaustive list as to what should be included in the due diligence exercise as the goal is to uncover anything that may be relevant to the purchase. It is ultimately for the buyer to decide whether to proceed with a purchase. The role of the due diligence professional is to provide the buyer with detailed information so they can make an informed decision.

Areas of Due Diligence

In carrying out a due diligence exercise, we would expect to consider the following aspects:

Legal Considerations

What are the relevant laws which may affect the transaction directly or indirectly? These laws can be both national, international or even local (e.g. a bylaw of a local authority).

What are the relevant contractual provisions? The buyer will inherit contractual provisions which would be put in place before the company is acquired. Due diligence will confirm the nature of these provisions and the extent of the buyer’s obligations under the contracts.

Employment Issues

The buying company will also inherit people employed by the target company although their new relationship will be affected by the nature of the takeover (share sale or asset sale).

Industry Risks

Due diligence will consider any risks which are unique to the industry and what mitigation needs to take place. Consideration will also need to be given as to whether the assets acquired are tangible assets, such as land or property, or intangible assets, such as services provided.

Reputational Risk

Due diligence will consider the reputation enjoyed (or not) by the target company and what reputational issues may arise with the buying company if it proceeds with the purchase (or if it is even made public that it is considering the purchase).

Communication Strategy

Due diligence will consider what should be communicated and how for the proposal during the due diligence process. Remember that the purchase may not occur in the end if the due diligence report raises adverse issues. The buyer would not wish to suffer any reputational damage by having gone through the process in the first place.

Independent Experts

Due diligence will also consider which third parties may be required to provide further insight, e.g. an accountant’s report on the target company’s financial viability; a surveyor on the structural integrity of a property that would be required etc.

This is in no means an exhaustive list of the considerations to address during due diligence and each transaction will turn on its own unique attributes.

Experienced solicitors are well-equipped to carry out due diligence exercises as they are trained to scrutinise the issues raised above.

If you require legal assistance, please call us at 02088585996 or email Winston.brown@brownandcosolicitors.co.uk