In the world of corporate transactions, the term due diligence is frequently used, but its meaning and importance can sometimes be overlooked. Due diligence is a critical phase that typically follows the agreement of Heads of Terms between the Buyer and Seller. It is the Buyer’s opportunity to investigate the target company or its assets in detail before committing to the purchase.
What is due diligence?
Due diligence is essentially an information-gathering exercise conducted by the Buyer to assess the true state of the target’s business or its assets. The goal is to verify whether the agreed purchase price accurately reflects the company’s or the assets’ financial health, legal standing, operational risks, and future prospects.
This process allows the Buyer to uncover any hidden issues that could affect the value or viability of the deal.
The Seller’s role in due diligence
While due diligence is led by the Buyer, the Seller plays a crucial role. The Seller must provide comprehensive and accurate documentation to support the Buyer’s review. This typically includes:
- Financial records (e.g. audited accounts, management accounts, forecasts)
- Legal documents (e.g. articles of association, shareholder agreements)
- Material contracts (e.g. supplier, customer, lease agreements)
- Employment information (e.g. contracts, benefits, disputes)
- Intellectual property and compliance records
- Real estate (e.g. leases and title to property)
These documents are usually uploaded to a secure online data room, where the Buyer’s advisers can access and review them systematically.
The duration of due diligence can vary depending on the complexity of the target business and the responsiveness of the Seller. Delays in providing requested documents or resolving identified issues can extend the timeline, so early preparation is key.
Common issues uncovered during due diligence
Due diligence can reveal a range of issues, such as:
- Undisclosed liabilities (e.g. pending litigation, tax exposures)
- Outdated or non-compliant employment contracts
- Inconsistencies in financial reporting
- Missing or invalid intellectual property registrations
Identifying these risks early allows the Buyer to mitigate exposure, either by renegotiating the deal terms or requesting specific protections.
How Buyers respond to findings
If the Buyer uncovers concerns during due diligence, they may:
- Renegotiate the purchase price; or
- Request indemnities to cover specific risks; or
- Seek additional warranties in the Share Purchase Agreement (SPA) or Asset Purchase Agreement (APA).
These protections are designed to shift risk back to the Seller if certain issues materialise after completion.
The outcome of due diligence
Once the Buyer and their advisers are satisfied with the information provided, the transaction can progress to the next stage of finalising the SPA or APA. However, it is important to note that disclosure is an ongoing process. New information may continue to emerge and be addressed right up until the agreement is signed and if the Seller becomes aware of anything during the process which it thinks ought to be disclosed, such as pending litigation, it should make the Buyer aware.
Due diligence is not just a formality; it is a vital safeguard for Buyers and a test of transparency for Sellers. A well-managed due diligence process can build trust, clarify expectations, and lead to a smoother and more successful transaction. For Sellers, being organised and proactive can help maintain momentum and avoid unnecessary renegotiations or delays.
How can we help?
Due diligence works best when it is well planned, well managed and properly interpreted. We support Buyers in scoping enquiries, reviewing findings and assessing how issues should be reflected in the deal terms. We also support Sellers in preparing for disclosure, running an efficient data room process and responding to enquiries in a way that maintains momentum and reduces the risk of late-stage renegotiation. Speak to our head of corporate and commercial, Victoria Holland, today.
About the author
Zarenna Porter is a solicitor in the Corporate and Commercial department. Her work spans a wide range of corporate and commercial matters, including acquisitions and disposals, share buybacks, company reorganisations and the drafting and negotiation of commercial contracts and agreements. She has supported businesses operating across different sectors, tailoring her advice to suit the distinct needs of both sole traders and larger corporate entities.