Surviving Due Diligence

“No Gain without Pain” is an expression frequently used by athletes to reflect the often tiresome efforts that are required to achieve the success they seek.

If you are a seller, the legal due diligence process involved in selling a company has some metaphorical similarities to an athlete’s training. You will be confronted with a substantial questionnaire asking detailed questions about the many legal and commercial issues that can affect businesses.

There will, for example, be detailed questions concerning the company’s contracts with suppliers and customers; employment contracts; IT Licences; pension scheme details; insurance policies and claims; and property details, to name but a few. This requires considerable effort on the part of the sellers in answering the questions and collating the paperwork required to provide the buyer with the necessary supporting documentation.

Some companies have immaculate procedures to ensure that all papers fall readily to hand, but most companies are less than perfect. Many sellers get caught out if they have not prepared in advance for the sale process and have to reveal that many of their key relationships are not documented. If you are contemplating selling your company, there are obvious advantages in grooming the company for a smooth sale. This may require a thorough review of employment files and policies, and making sure that key relationships with suppliers, long-term customers and funders are documented.

We have seen too many instances where licences and permits which are necessary for the running of a business, have been allowed to expire or not even applied for in the first place. There then follows an unseemly scramble to apply for such permits retrospectively, which can hold up deals for weeks.

Another issue which regularly causes problems is a lack of clarity around workers who are treated as self-employed but are arguably employees if the relevant tests are applied. This can give rise to arguments about indemnities to cover the potentially large PAYE cost that may fall on the target company if the self-employed status was ever challenged by HMRC.

Therefore, the answer to surviving due diligence is to get proper systems in place in advance. This is not only a good approach in itself but will save a lot of frantic effort in the run up to a sale. To return to the sportsman analogy above, an athlete would not defer his training for the Olympics until the last two months before the first race. The same approach should apply to owners of companies who are contemplating a sale.

This article is for general information purposes only and does not constitute legal or other professional advice. You should not act or rely upon this information. Ashton Graham is authorised and regulated by the Financial Services Authority. Ashton Graham solicitors are regulated by, the Solicitors Regulation Authority No. 50075.

By Paul Whittingham, Ashton Graham Solicitors