As part of the purchase of a business, the buyer will conduct a process called ‘Legal Due Diligence’. This process involves the buyer requesting various documents and information relating to the business. Once provided by the seller, the buyer will then review to ensure that they are happy to proceed with the transaction.

The due diligence process is an important aspect of the mergers and acquisitions process and is designed  to enable a buyer to understand the position with the business and the risks associated with the acquisition of the business.

Whether you are a buyer or a seller, this article will give you clarity on the documents you should be requesting/providing to ensure a smooth transaction.

Accounts

The buyer will want to see various documents relating to the accounts of the business such as:

  1. Year-end accounts for the last 3 years
  2. Corporation Tax returns for the last 3 years; and
  3. Management accounts and profit and loss for the last 2 financial years.

Liabilities and Finance

It will be vital for any buyer to ascertain what finance is outstanding in a business. It is likely that a buyer will want any outstanding finance to be settled. The seller should provide:

  1. Copies of any finance agreements, for instance any leases of equipment, hire purchase agreements or documents relating to any loans or overdrafts in the business
  2. Details of any outstanding debts owed to the business older than 60 days
  3. Details of any unusual liabilities owed by the business which are not ordinary trading liabilities
  4. Copies of any debentures or other security on the business; and
  5. Any personal guarantees that the seller is subject to.

Premises

Often it is important for a buyer to have a clear understanding as to the position with any property in the business, whether this is a freehold property or a lease on a property. If the business owns or runs from a premises, the following documents may be applicable:

  1. A list of all properties, including the full postal address, from which the business trades
  2. A copy of any lease of any business premises
  3. A copy of any notices served under the Landlord and Tenant Act 1954 (if applicable)
  4. Title documents for the property
  5. Any asbestos reports, fire risk assessments or similar relevant to the property
  6. If there is any finance secured against the property, provide copies of the finance documents.

Contracts

Buyers need to understand what contracts a business is subject to and it will be necessary to understand the key terms of material contracts including any change of control provisions. It is therefore likely that a buyer will require:

  1. All versions of template terms of business or similar for the Company; and
  2. Copies of any continuing contracts associated with the business for which the business will be tied into for a period of time after any sale, for instance any contracts relating to the utilities, equipment maintenance, IT Support, cleaning or the supply of goods or services.

Insurance

The buyer will want to ensure that the business is properly insured and any change of control provisions in an insurance policy. The seller should provide:

  1. Copies of all existing insurance policies relating to the business
  2. Confirmation as to whether any claims have been made on any insurance policy in the last 6 years. If a claim has been made, the seller should confirm details
  3. Whether there are claims outstanding; and
  4. What any claims related to
  5. Any applicable documents relating to any claims.

Employees

One of the central considerations for any business buyer relates to the current employees of the business and who is crucial for the ongoing operation of the business. If the business has employees, the following documents may be applicable:

  1. Copies of all employment contracts
  2. Copies of the staff handbook and any applicable policies and procedures
  3. Copies of any employment tribunal proceedings brought against the business in the last 3 years; and
  4. Copies of all documents relating to the company pension scheme.

Regulatory, Accreditations and Licences

If the business is authorised or regulated by a regulatory body or similar, or if the business holds any relevant licences, the following documents may be applicable:

  1. A copy of all current licences held
  2. A copy of any applicable regulatory documents confirming authorisation
  3. A copy of any accreditation certificates and confirmation of the expiry date of these; and
  4. Confirmation that the business has not been subject to any regulatory, disciplinary or similar proceedings by a governing body in the last 3 years.

Data Protection

The seller should provide:

  1. A copy of the Privacy Notice or similar; and
  2. Confirmation that there are no outstanding investigations or complaints by anyone concerning the business and there are no outstanding matters with the Information Commissioners Office. Provide documents relating to any such complaints or investigations.

The Legal Due Diligence process can feel long and arduous sometimes but with the right guidance and understanding it can flow effortlessly and efficiently. Although this list is a lengthy one, it is important to tailor it to the business being acquired to ensure a stress-free transaction.

If you’re considering purchasing or selling a business, let us help you navigate the legal complexities. Contact Richard Coulthard on 0113 284 5000 or email Richard.coulthard@isonharrison.co.uk.