Whilst many companies, together with their shareholders and directors are navigating the continuing disruption of the COVID-19 pandemic, some have made the decision that now is an opportune time to sell the business. What do buyers need to consider when pursuing a new opportunity at this time? 

The concept of “Caveat emptor” meaning “buyer beware” is integral to the approach to an acquisition and undertaking the due diligence process is one of the most crucial elements of the transaction Buyers must ensure that they are fully aware of all/any potential skeletons that may be lurking in the closet to expose risks and liabilities. Government imposed lock downs as well as global restrictions caused by the pandemic, coupled with social distancing rules have caused unprecedented disruption to businesses. This makes the due diligence process more important now, than ever.

The due diligence process is largely bespoke, by raising enquiries specific to the target company, its business undertaken and the particular industry or sector in which the company operates within. In terms of COVID-19, buyers will want to consider the following enquiries:

Contracts

Every company in some way will have been affected by the COVID-19 pandemic, which would have a knock on effect on the relationships they hold with their customers and suppliers. Buyers will want to analyse whether the target company is able to perform their obligations under existing contracts or if there is a potential that another party is not in a position to carry out their obligations thus affecting the company. In the event that a contract has been terminated and invoked any force majeure rights, the Buyer will want to analyse what impact this will have on the target company to continue operating in the ordinary course.

Compliance

COVID-19 triggered emergency changes in law and regulations and implemented new initiatives with the aim of protecting against the effects of COVID-19. Consideration should be given to whether the company has been compliant with these changes and whether any element of the company’s business or sector is restricted in any way as a result of the changes implemented. 

Data Protection

Whilst working remotely and having employees working from home in response to COVID-19 may have its benefits, there is a heightened risk when it comes to Data Protection.  What has the company put in place to reduce the risk of a breach of Data Protection or potential cyber-attack? Has the company experienced any issues which if not dealt with could result in a breach? In view of new working practices the company should review policies in place for its employees.

Employment

Inevitably the pandemic will have affected those employed by the company, whether this is through absence as a result of isolation from contracting the virus or due to a health condition which puts them into the clinically extremely vulnerable or clinically vulnerable categories.  Has this impacted the business of the company? Have health and safety procedures to ensure a safe working environment been put in place for those who cannot work remotely? Are there policies for employees to work remotely from home? Has the company had to make the tough decision to make any of its employees redundant or furlough its employees? 

Finance

Whilst COVID-19 triggered emergency changes in law and regulations, financial schemes and other measures were put in place to support UK businesses to protect them against financial issues as a result from the pandemic. Consideration should be given to what financial support has been obtained and whether this has been accounted for in the appropriate manner or what support is the company eligible for which can be obtained following the completion of the transaction.

Insurance

To protect the business a company may have sought to claim against their insurance policies, in particular claiming for business interruption losses as a result of COVID-19. Enquiries will need to be raised to ensure that the claims have been properly dealt with and whether as a result of such a claim this has affected the insurability of the company in the future.

IT Systems

With new working practices implemented for the foreseeable or even the new normal for the company, can the company’s IT infrastructure deal with and support secure remote working. Has the company needed to increase the licenses held or review terms of any of its licenced software? Are there any issues with the IT infrastructure which will hinder the ability to have increased demand as a result of the pandemic?

Tax

The buyer should always seek to understand the tax position of the company and the extent of any potential exposure of risk to the company. In view of changes to law, regulations and implementation of financial assistance as a result of COVID-19 it is more prevalent to understand the additional tax risks the company may be exposed to as a result of obtaining assistance during this unprecedented time.  Whilst we cannot advise on tax issues, additional enquiries should be raised and responses on the same can then be discussed with your accountant or financial advisor.

The above mentioned points of consideration are by no means an exhaustive list, the intention of the due diligence process and the questionnaire is to ensure that the buyer knows every detail about the company, big or small, good and bad every cupboard should be checked.

The due diligence process is not just a benefit to the buyer, but in turn protects the sellers position by giving the buyer actual knowledge and negates the sellers liability for any potential breach of warranty, which has been negotiated under the requisite agreement in play to govern the testosterone gel stacking oriental testosterone transaction.  Whilst the due diligence process is generally undertaken at the start of the transaction, more companies are deciding to undertake the process prior to the point of a sale being negotiated. This not only ensures the company, its shareholders and directors are prepared for the process, but helps to identify and take any necessary action to address those identified points that need dealing with, such as ascertaining ownership of intellectual property or reconstituting statutory books.

If you are interested in buying or selling a business and would like more information in relation to the Due Diligence process then please do not hesitate to contract our experienced team on 01604 828282 / 01908 660966 or email BusinessServices@franklins-sols.co.uk.

When you decide to buy a business, the first thing you need to do is evaluate what you are purchasing – both the good (assets) and the bad (liabilities).

The due diligence (DD) process is the pathway for you to: 

• obtain information about the company – is it a good deal or not?
• get a feel for what conditions and warranties you need going forward;
• assess the appropriate corporate structures (to acquire and for the target) and put those in place;
• make sure all regulatory or other consents are in hand (or made conditional) prior to the acquisition; and
• agree a price and mechanism for adjustment if necessary.

Why should you undertake DD? 

The primary purpose of the DD review is to obtain sufficient information about the target’s business to enable the buyer to decide whether the proposed acquisition represents a sound commercial investment. DD is effectively an audit of the target’s affairs – legal, business and financial. It is therefore a crucial bargaining tool for the buyer. 

A DD enquiry should establish the following key information about the target business: 

• Does the seller have good title to the shares in the target company (on a share purchase) or assets being sold (on an asset purchase)?
• Are there any unstated or understated liabilities? 
• Detailed information on the target business so that the buyer is in a better position to: 
  • – Make a final decision on whether to proceed with the acquisition and, if so, at what price;
  • – Bargain with the seller;
  • – Plan the integration of the target business;
  • – Determine any consents that may be required for the transaction. For example, the consent of industry regulators, tax authorities, competition authorities, shareholders or important customers of the target. Where one of the main assets of the target is customer contracts, it will be imperative for the buyer to find out through DD whether there are any contractual prohibitions on transfer; and 
  • – Determine whether any ancillary documents will be needed (for example, a transitional agreement).

As well as answering these questions, the DD process should put the buyer in a better position to identify the steps necessary to take effective control of the target’s business.

Financial DD

As part of the DD process, the buyer may instruct accountants to prepare a report (the accountant’s report or long-form report) on the financial aspects of the target business. 

This financial DD is not the equivalent of an audit, and accountant’s reports will usually make this clear. However, financial DD should focus on those areas of the target’s financial affairs that are material to the buyer’s decision, so that the buyer can assess the financial risks and opportunities of the deal and whether, given these risks and opportunities, the target business will fit well into the buyer’s strategy. Financial DD may also help quantify:

• Potential synergies;
• The best acquisition and financing structure;
• The impact of the acquisition on the buyer’s performance metrics. When the buyer’s accounting policies are more conservative than those followed by the target business, it may be necessary to make appropriate adjustments in order to measure the true impact. 

How can Franklins help? 

The scope of a DD investigation will depend on the value and purpose of the acquisition. The extent of the investigation tends to be influenced by practical realities: 

1. How much time do you have?
2. What resources are available? 
3. What is the overriding need to get the deal done? 
4. How transparent is the seller in terms of providing information?  
5. Do you have internal or third party resources to back up what the lawyers can find? 

Franklins can help throughout – from agreeing the appropriate scope of the DD exercises through to data room protocols, document analysis and formal reporting. We have a whole range of specialist sector experience and can bring market expertise as well as legal advisors, which means we can offer a wrap-around service. 

Only the buyer’s own personnel will be able to make effective judgements as to the commercial importance and potential risk brought to light by the DD process, but Franklins can make sure that this information is presented in an accessible and useful format and informs all subsequent negotiations.

Find out more on our Due Diligence page.

For more information contact our Due Diligence team ddaudit@franklins-sols.co.uk or call 01908 660966/ 01604 828282.