Are you thinking about selling your company or business? If the answer is yes, you are in the right place, and we are keen to help you understand the due diligence process in a business sale.

Selling a company (share sale) or business (sale of individual assets/obligations) is a challenging process for all business owners, regardless of experience. It can also be time-consuming depending on the deal’s complexity.

For the sale to be successful, both the seller and the buyer must commit to the deal. Additionally, they must complete it within the agreed timescale. Otherwise, it can lead to unnecessary delays. This article will focus on the first stage of the sale, which is the due diligence process. 

Why should I prepare the due diligence process first?

In order to ensure the sale runs smoothly and according to timetable, it is absolutely critical to ensure that your first priority is to collate all relevant documents you have in relation to the business. You must also respond to the buyer’s questions. This is the due diligence stage, where the buyer undertakes a comprehensive investigation into various aspects of the seller’s business. They do this so they obtain as much information as they can to make sure there are no hidden issues that might affect the sale/sale price. 

Whilst the due diligence investigation is carried out by the buyer and/or its representative(s), such as its solicitors or accountants, it is up to the seller to provide all the relevant information that the buyer needs. If you fail to provide relevant information, you may find that you are liable for breach of warranty (a promise made in the sale agreement as to the state of the business).

So, you still need your own due diligence process. It ensures you are fully prepared, at the start of the deal, for the scrutiny that will follow. We recommend that you commence your due diligence process preparation well in advance of the deal. This is advisable even before solicitors or accountants are involved. (Due Diligence Checklist) This can help facilitate the process and save time and costs when professional advisers become involved. It also provides enough time for you to identify any issues. This allows you to respond fully when asked by the buyer. The worst case, of course, is that if you are unable to provide the required information (for example, copies of material contracts), the buyer could simply withdraw from the deal due to lack of certainty. 

What can I do to prepare in advance?

As mentioned above, it is sensible to make sure you are ahead of the game. Even regular reviews can make a vast difference to the due diligence process. You are already identifying potential gaps in your business. Examples include but are not limited to: 

  • Confirming that the accounts (annual and management) and financial statements are up to date and filed. 
  • Ensuring any contracts, policies and records are up to date and available. 
  • Being prepared (and permitted under the terms of relevant contracts) to provide details of any trading and supplier contracts and any other contracts you have. 
  • Having up to date records of your company and checking that they correspond with the records held at Companies House. 

Key areas of the due diligence processs and the documents to be disclosed

Although the buyer might request additional documents depending on the industry, below are the key areas a buyer is likely to request to see. We recommend that a virtual ‘data room’ (i.e. simply a cloud storage site that people can be granted access to) is set up. Through this, you can identify the files uploaded and easily share them with the buyer. 

  1. Corporate structure and records – this confirms whether the company has updated its filing history at Companies House. It also includes records of any board minutes and shareholder resolutions. Furthermore, it checks whether the company has up-to-date statutory registers.  
  2. https://farringfordlegal.co.uk/blog/why-are-shareholder-agreements-important/Share capital and shareholders – a buyer will want to know whether there has been any share restructuring, investments, and share transfers, for example. 
  3. Accounts – you will need to provide the company’s annual accounts and reports, management accounts and any budgets or forecasts.
  4. Finance and banking – a buyer will want to know the details of the company’s bank accounts and other finance-related issues. 
  5. Assets – you will need to provide a list of all assets owned by the company and any encumbrances against them. 
  6. Contracts and trading – this includes all business contracts the company is a party to. 
  7. Intellectual property – is there any IP owned by the company? If so, the buyer will want to see the details. 
  8. Insurance – this confirms whether you have insurance policy documents and certificates of insurance, such as employer’s liability insurance and public liability insurance. 
  9. Consents and compliance – whether the company requires third-party consent to sell their business and whether the company has adhered to any consent requirements. 
  10. Litigation and disputes – you should disclose pending or threatened litigation or disputes the company is involved in. 
  11. Employment – this is usually an anonymised list of all employees and directors with relevant information about each employee. If you have any consultants or freelancers, you will be required to disclose them and provide copies of their contracts. 
  12. Property – you will need to share any information of the company’s freehold or leasehold properties it owns or occupies. If, which would be very unusual (but it happens), any property is not registered at the Land Registry, consider carrying out a registration.
  13. Environment – are there any environmental reports or assessments relating to the company? 
  14. Heath and safety – this includes all documents in connection with the company’s health and safety management system. This includes health and safety policies and the accident book. 
  15. Retirement benefits – the buyer will want to see all documents relating to the company’s pension schemes. They will also need any letters to confirm whether the company has failed to comply with its obligations in relation to pension.  
  16. Tax – the buyer will want to see the company’s corporation tax returns and any other relevant tax matters affecting the company. 

We understand that selling a business can be a difficult and time-consuming process. However, the decision to do so can also be incredibly rewarding. Our team at Farringford Legal are available to guide you through the process. If you are starting due diligence for a business sale, download our Due Diligence Checklist.