You are currently viewing Due Diligence and Disclosure Letters

Due Diligence and Disclosure Letters

What is Due Diligence?

Once a deal for a sale is agreed, a sensible buyer will usually conduct a “due diligence” exercise. Essentially, this is the process of gathering information about the target business and discovering any potential liabilities which could have an impact on the purchase price, or in the worst case, be a deal-breaker. During due diligence, a buyer will ask various questions to which the seller must respond and provide copies of the information and documentation required. The exercise will have a large impact on how the sale documents are negotiated and framed.

The scope and extent of due diligence which will be carried out by a buyer (e.g., legal, financial, business, employees, and customers) will depend on various factors, including the size of the deal and the buyer’s specific requirements.

Conducting due diligence before a business acquisition

Establishing the commercial value and financial position of the business you wish to purchase requires conducting due diligence during the initial sale process.

  1. Financial Position – The seller will disclose a detailed view of the companies’ financial history if it has become apparent that you are a clear contender, poised to submit a competitive offer.

If you wish to access a snapshot of this before expressing interest, much of this information will be readily available which will be usually tied to a non-disclosure agreement.

Companies House provides public access to company records, including company accounts and registered office details. It also houses information about insolvency activity, such as company liquidation or a strike-off request.

  • Buyer transparency- The most straightforward route to seeking answers to unanswered questions is to directly communicate with the buyer. By speaking transparently about any concerns or enquiries, you can uncover a true portrayal of the company and address any concerns which may hinder you from submitting an offer.

It is in the best interests of sellers to lift any smoke screens to maximize the chances of securing a buyer. By shining a light on the finer details of the business, the seller can ward off any objections likely to arise in the future.

  • Market Position- You have to consider future economic health and policy changes when buying a business. The Coronavirus pandemic and Brexit may require changes in your business relations plans and marketing strategies for consumers. In order to accurately assess the asking price, you can anticipate any upcoming changes that may result from Brexit..
  • Growth Potential- As well as this, following the due diligence process of a company must be based on facts as well. Since the potential for growth is often based on an intangible vision, it would be in your best interest, as a buyer, to understand if existing targets can be achieved and how far the company must travel to reach them.

By taking stock of company assets, investments, subsidiaries, and analysing trends in financial performance, you can accurately gauge the growth potential of the company.

  • Media Coverage- Using media coverage information, you can assess the public’s perception of the business. Positive PR around the brand name can help bolster the reputation of the company and mark key milestones.

Consumer opinion can provide insight into whether a brand is credible or not. To determine how a brand is perceived and customer service levels, social media tracking is a useful tool.

If any assistance is needed while buying or selling your business, contact help@bizlawuk.co.uk or WhatsApp us on 07583452230 and we can connect you to our specialist expertise.

What is a Disclosure Letter?

A disclosure letter is a key document in many sales and purchase of business transactions, including asset and share sales. Information about the business will be given to the buyer to assist with due diligence

Disclosure letters provide a qualification to the representations and warranties made by a seller. When a seller discloses an event leading to a breach of warranty, the buyer cannot claim remedies

For both sellers and buyers, adequate disclosure is vital to avoid future claims and make informed investments and acquisitions.

A disclosure letter serves two main purposes-

  1. Information Provision-A business or asset for sale includes details about the business or asset that may be of particular interest to buyers. This information complements information already provided: In the data room of the transaction; or to the purchaser as a part of the information exchange between the parties. In addition to updating the purchaser with changes to the documents and information previously provided.
  • Limiting Warranties- A disclosure letter also serves a very important purpose in minimising the seller’s liability. It is often used to limit any warranties that the seller provides in the sale agreement.

In the disclosure letter, any information about the sale asset that is inconsistent with its warranty should be listed. The purchaser will not be able to dispute an incorrect or untrue warranty from a seller.

A disclosure letter needs to be properly prepared and advised on to avoid unforeseen complications. If a seller is not properly advised, then they could potentially be forced to repay some of the purchase prices. Without proper advice, the buyer’s business could be worth less than they imagined.

If any assistance is needed while buying or selling your business, contact help@bizlawuk.co.uk or WhatsApp us on 07583452230 and we can connect you to our specialist expertise.

Reina D'costa

Dual qualified, experienced, practical and proactive solicitor. Founder of Bizlaw UK, a new model legal service consultancy.