Risking it all: the dangers of inadequate due diligence

For the buyer:

If a buyer does not conduct a thorough due diligence process at an early stage, it could delay or even derail the entire deal  and increase transactional costs due to the need to address unforeseen issues.

Hidden liabilities

A buyer could inherit unknown debts, tax obligations, legal proceedings or compliance failures, reducing the target’s value Had the buyer been aware of these issues, they could have made an informed decision on whether to proceed, and the sale and purchase agreement could include appropriate protections.

Unreliable financials

It is crucial to assess all financial details in any M&A deal to ensure that the assumptions made in arriving at a purchase price are accurate and future value is not overestimated.

Legal or compliance issues

Pending litigation, contractual or regulatory breaches, or non-compliance with industry standards and regulations can stall a deal or create complications. Fines for compliance failures can be substantial, often linked to turnover and any reputational damage could have long-lasting effects.  A change of control could trigger termination clauses in contracts, risking the loss of key contracts or funding.

Consents

Some transactions require prior approval from the government.  Proceeding without the necessary consent can result in severe penalties or even criminal charges.

Overpaying 

Failing to fully evaluate the market, competition and growth opportunities can lead to overpayment.  By identifying these issues early in the process, the buyer can be protected from paying too much.

Integration challenges

Retaining key employees is often critical to success, and the buyer can understand business culture and address concerns during the due diligence process.

For the seller:

It’s important for the seller to ensure  that all of the target’s documents and procedures are in order.  This helps  minimise the risk of the buyer identifying issues that could lead to additional liabilities for the seller in the sale and purchase agreement.

Being prepared also helps the seller identify issues that should be addressed in the disclosure letter – a key document for the seller to limit liability under the sale and purchase agreement.

The seller should ensure the following documents are in order:

• statutory books and minutes, corporate records and any existing shareholder agreements
• accounts, financial records and tax documents
• trading contracts (both customer and supplier)
• employment contracts and pension details
• data protection policies and procedures
• IP and IT licences
• regulatory licences
• property information and documentation
• environmental and health & safety records

Our corporate solicitors are here to assist with the due diligence process and to guide you through the M&A transaction.