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Top tips on due diligence

Bobby Lane, a partner at Shelley Stock Hutter LLP gives his top tips on carrying out due diligence.

If you are buying a company, there are two main options:

  1. Buying the assets which means you can be selective and only buy what you want – The Good Bits
  2. Buying the shares which means you will own the whole company – The Good and The Bad Bits

Whilst the preferable route for a purchaser is to buy the assets, for the seller there are real tax advantages to selling the shares; mainly the opportunity to obtain entrepreneurs relief on the sale and potentially pay only 10% in tax.  Whichever route is agreed, it is essential as the purchaser that you carry out work known as due-diligence; this means taking a look under the bonnet of the business to ensure that there are no skeletons hiding in the cupboard and that the ‘plusses’ of buying the company are really as good as the vendor is saying. 

During the due diligence process your team will need to review the latest information available including:

 The latest finalised year end accounts, together with the two previous years.

  •  Management accountants
  • Forecasts and any business plans

Other Areas to think about include:

  • If you are taking over a lease you will need a lawyer to look into this so that the terms can be explained to you including the length of the lease, break clauses and rent reviews.   You will also need to ascertain whether or not it is a Tenant or Landlord Repairing Lease. 
  • If you are taking over employees you will need to be aware of the Transfer of Undertakings (Protection of Employment) Regulations. Unless certain measures are taken, you will  take over all the responsibility for the employees going back to the date when they first commenced employment with the vendor. This includes things such as entitlement to redundancy and maternity pay.
  • If you are only buying a percentage of the business take care if  you do not have control and/or you end up in a 50/50 situation. Sometimes this is unavoidable, but in a 50/50 situation a stalemate can arise should there be a conflict, which is often difficult to resolve.It is recommended that you put a Shareholders or Partnership Agreement in place to cover as many potential problems that could arise.

If you are buying the shares of a company rather than just the assets, due diligence costs will be higher as there is more risk to the purchaser. But the cost can pay for themselves,  as more often than not issues will be identified during the process and  will allow the Purchaser to renegotiate the price!

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