The importance of due diligence

When acquiring a business via an asset acquisition or acquiring a company via a purchase of shares, due diligence is a vital part of the process.

As a buyer you need to understand exactly what you are buying before committing to the purchase. You have to ask the right questions to obtain that information, as the seller is not under any duty to disclose all relevant information to you.

With a business/asset acquisition you can choose which assets and liabilities you will acquire and those which the seller will retain.

However, with a company/share acquisition, you will acquire the company with all of its existing assets, but also all of its existing liabilities.

Therefore, the due diligence process enables you to establish where any areas of risk may lie. If you then anticipate that you may suffer a loss after completion of the purchase as a result of any such matters, such as an ongoing dispute with a third party, that risk can be dealt with accordingly in the main sale and purchase agreement.

Alternatively, material issues which arise as part of the due diligence process could force you to walk away from the deal or give you the ability to re-structure the transaction or negotiate a reduction in purchase price at an early stage.

Depending on the size and complexity of the transaction accountancy, tax and legal due diligence are likely to always be required, but commercial, IT, insurance, and operational due diligence may also be necessary.

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