It may come as a shock to realise that we are fast approaching the last quarter of 2024. This is a time when directors start consolidating their company’s plans for the next year. If yours involves expanding your business through a merger or acquisition (M&A), you need to ensure you have completed a thorough due diligence exercise before signing on the dotted line. This will mitigate the risk of several nasty post-deal ‘surprises’ occurring, such as having to manage an unresolved legal dispute or discovering the newly acquired organisation’s sales funnel has more leaks than your kitchen sieve.

Conducting due diligence involves a comprehensive review of all aspects of a business to uncover any risks that could influence its future value or integrity. This process also helps reveal hidden opportunities that may not be initially visible.

Through due diligence, you can:

• Assess the business’s strengths and weaknesses.
• Ensure the valuation is accurate, providing leverage for negotiations.
• Identify risks that could influence the deal’s structure.
• Determine if any third-party consents are necessary to proceed with the transaction.
• Establish where warranties and indemnities should be applied.
• Gain an in-depth understanding of the business, enabling you to address operational needs immediately after acquisition (e.g. supplier changes).

Essential Due Diligence Checks When Acquiring a Business

Undertaking adequate due diligence involves the following actions:

Financial Information

• Review financial statements (balance sheet, income, and cash flow) for the last three years.
• Examine the company’s debt structure, including loans and liabilities.
• Analyse gross profit margins and capital structure.
• Review future projections, strategic plans, and budgets.
• Ensure all non-operating expenses are accounted for.
• Compare actual sales with projected figures.
• Review a detailed list of company assets and liabilities, including any unrecorded liabilities.

Legal Information

Ensure the following are analysed.

• Leases (for equipment, vehicles, and properties).
• Property details.
• Purchase agreements and incorporation documents.
• Intellectual property, including trademarks, copyrights, and patents.
• Distribution agreements and sales contracts.
• Any ongoing or potential legal disputes.
• Any ongoing or potential regulatory investigations.

Marketing

• Analyse past and current marketing strategies, trends, and ROI.
• Review the results of recent marketing campaigns.

Market Analysis

• Evaluate the target customers and their demographics.
• Assess competitors and the geographic economic outlook.
• Examine the brand’s public perception and industry trends.
• Conduct a SWOT analysis to understand the business’s position in the market.

Products and Services

• Identify the company’s products and services, focusing on their profitability.
• Consider future enhancements to offerings and warranty claims.

Employees

• Review the employment structure, including employee positions, qualifications, and salaries.
• Assess future staffing requirements and examine employment contracts, including benefits and commission schemes.
• Ensure time-off, holiday policies, and employee share schemes are in place.
• Check there are no current or potential Employment Tribunal Disputes pending.

Customer Information

• Identify the company’s customers and retention rates.
• Review the cost of acquiring new customers and satisfaction levels.
• Check if the business has lost any significant clients in the past two years.

Tax Information

• Review tax returns from the past five years, VAT registration, and employment tax filings.
• Analyse any tax settlements and liens from recent years.
• Check all tax payments are up to date and there are no current or potential HMRC investigations pending.

How a due diligence risk management expert can assist you with an M&A

Due diligence exercises take time and expertise. The person undertaking the exercise must also be careful not to breach the Confidentiality Agreement signed before due diligence can occur and/or risk the deal going ahead by being too heavy-handed in their investigations.

Instructing a professional protects your relationship with the seller while allowing you to be confident that they know exactly what to look for to ensure your best interests are protected.

• Assisting your M&A team in identifying how the acquisition aligns with your brand, expands your market, or achieves key business goals.
• Scrutinising financials, highlighting risks, and providing insights to strengthen your negotiating position.
• Detecting potential litigation, regulatory concerns, or tax issues.
• Reviewing commercial contracts (including those with IT providers, clients, and suppliers) to identify any risks.
• Conducting an HR analysis to uncover potential employment law claims or grievances.
• Analysing intellectual property to ensure protection and flag any potential infringements.
• Reporting on domestic and international regulations that could impact the transaction or future profitability.
• Examining the target’s tax structure and its effect on the deal’s objectives and long-term profitability.

Getting legal advice

Successful M&As require proactive action, especially regarding risk management. Investing in a professional to undertake extensive due diligence will ensure:

1. You are paying a fair price for the business, and
2. You know precisely what you are getting, warts and all.

To find out more about how our team can undertake due diligence, please email us at [email protected] or phone 0121 249 2400.

The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article, please contact 43Legal.