When buying a company by purchasing the entire share capital, you’re not only acquiring the assets, you also take on the liabilities, contracts, and history of the company. This is why carrying out a thorough due diligence process is such an important part of any deal. It allows a potential buyer to examine the company before completion, so that they are aware of any potential risks and can make informed decisions.

What is Due Diligence?

Due diligence is a detailed investigation into the health of the company you’re looking to buy. It’s designed to:

• Uncover hidden problems – such as outstanding debts, disputes, or any tax issues.
• Check key details are accurate – ensuring that the assets, contracts and ownership of the company are as presented to the buyer.
• Highlight risks that affect value – so the buyer can negotiate a fair price.
• Inform the legal contract – ensuring the sale agreement includes protections for both the buyer and the seller.

What is involved in Due Diligence?

Due Diligence often covers many areas, depending on the structure of the deal and also often the size of the target company or target group.

1. Legal checks
   • Company ownership and structure (to ensure the seller does legally own the shares that are being sold).
   • Review of the company’s constitution, any shareholder agreements or investment agreements.
   • Key contracts with customers, suppliers, and employees.
   • Any disputes or potential disputes, regulatory issues, or compliance concerns.
2. Financial and tax review
   • Past accounts and current financial health.
   • Outstanding debts or hidden liabilities that the buyer would be inheriting.
   • Tax compliance, including VAT, PAYE, and corporation tax.
3. Property and assets
   • Confirming ownership of any heritable (freehold) property through the Registers of Scotland (or equivalent).
   • Review of leases, title conditions or licences regarding any business premises.
4. Commercial and operational review
   • Understanding key relationships and dependencies in the business, such as customers or suppliers.
   • Checking ownership of intellectual property, brand rights, and IT systems.

All this information is usually gathered in a secure “data room” to be reviewed by the buyer and their legal advisors. This will then inform the due diligence report which highlights risks and practical steps to address them before completion.

How does Due Diligence protect the buyer?

The findings of a due diligence report will assist the buyer in successfully negotiating the share purchase agreement and will help protect them from any potential issues which may not have been obvious from the outset. If there is a risk identified during the process, the buyer will then have the ability to:

• Negotiate a reduction in the purchase price to reflect the risk the buyer is taking on;
• Build protections into the share purchase agreement (such as warranties and/or indemnities) to protect the buyer if an issue were the arise following completion; or

• Request that the seller resolves certain issues prior to completion, this is known as a “conditions precedent”.

This means the buyer will only move forward once they are confident they understand the company fully.

Why Work With a Corporate Lawyer Early?

Engaging a corporate solicitor early on in the process means that they can:

• Guide you on what to ask for and what’s reasonable.
• Spot “red flags” quickly so you don’t waste time or money.
• Work with tax advisers, accountants, and property specialists to give you a full picture.

Final Thoughts

Buying a company is a big investment and can often be a big risk, especially when you don’t know if there are any skeletons in the closet. The due diligence process ensures you know exactly what you’re taking on, reduces risk, and gives you leverage to negotiate better terms. With experienced corporate lawyers guiding you through it, you can buy with confidence.

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The information and opinions contained in this blog are for information only.  They are not intended to constitute advice and should not be relied upon or considered as a replacement for advice.  Before acting on any information contained in this blog, please seek solicitor’s advice from Gilson Gray.