If you are considering a merger or acquisition, it’s essential that you take professional advice before taking any decisive steps. One of the most important parts of the process is due diligence – a legal and financial assessment of any potential risks in the transaction.
This requires an investigation of the obligations and liabilities of the other company and is generally carried out by accountants and solicitors, or in-house teams in very large businesses.
Historically, legal and financial due diligence has been carried out by separate professional advisers in different firms. However, changes in regulation of the legal profession have given clients the opportunity to obtain a single financial and legal due diligence service from one company.
This change followed the Legal Services act of 2007, which aimed to open competition in the legal sector by allowing ‘Alternative Business Structures’ such as accountancy firms to provide legal services. Alternative legal service providers must be registered and approved by the Solicitor’s Regulatory Authority (SRA).
At Accounts and Legal we have received approval from the Solicitor’s Regulatory Authority (SRA) to offer legal services. We are very honoured to be one of only a small number of accountancy firms who have received approval from SRA as a multi-disciplinary practice, and we’re now legally authorised to provide legal advice and services.
This change can benefit small and medium businesses considering a merger or acquisition because it allows them to work with a single firm that understands their business and the markets they operate in as well as providing the essential services under one roof.
Working with a single firm can also save time, which is a valuable commodity in a pressure situation where speed is essential. A business working with an accountancy firm would have to search for a law firm experienced in mergers and acquisitions and then spend time bringing it up to speed with its business and its objectives.
Companies offering both accounting and legal services - like ours - can share that essential information within the boundaries of their own professional regulations, saving time and ensuring a consistent approach to the due diligence process.
And, taking a step back, a firm offering both services can look at the potential benefits, opportunities and downsides of the transaction from both a legal and financial perspective before the due diligence process needs to begin. That can give you a well-rounded perspective on the move and could prevent you from making an expensive mistake before you pay out for due diligence.
To understand why both legal and financial due diligence are required, it’s important to look at what the two processes cover. Ignoring one side of the equation can put the outcome of the transaction at risk.
A financial due diligence review assesses the historical financial performance of the other company and its forecast financial performance. The aim of the review is to consider if the forecasts are reasonable and represent a true and fair view of the other company’s performance.
The findings of the review provide information that is essential to finding a fair purchase price that is agreeable to both parties.
The review should also investigate the reasons behind any significant trends or changes in historical results. To carry out financial due diligence, accountants review three types of information:
Historical records such as statutory financial statements and management accounts
Current financial data such as management accounts for the year to date
Financial forecasts such as budgets and cash flow forecasts.
During the assessment, accountants consider if the information is reliable and if historical earnings are sustainable. Looking at current performance and future forecasts they try to establish potential future earnings and consider any tax consequences based on the forecast.
They use their professional judgement to assess if any warranties and guarantees should be included and if there are any factors that could be considered potential deal breakers. For example, there may be large tax liabilities, outstanding debts or impending financial penalties.
Although they may not break the deal, these factors would be the subject of further negotiations over the purchase price.
Legal due diligence can help you find out more about a number of aspects of the other company, including:
Its commercial contracts and whether they can be transferred to a new company
Environmental and health and safety record and policies
Regulatory compliance requirements
Outstanding litigation issues
Property ownership and other assets.
The legal due diligence review can give you an overall picture of the company’s operations and the potential value it could add to your own business.
Solicitors will be looking at the legal implications of any of the factors. Will you be able to transfer existing contracts, for example? Can you meet the other company’s compliance requirements or employment policies? Could the outstanding litigation issues pose risks to your reputation? How valuable are the company’s intellectual property rights?
Like financial due diligence, this legal assessment can help you decide if the purchase price is fair and if there are any significant risks that should be covered by guarantees.
Because both aspects of due diligence are equally important, we believe that there are very strong benefits for using the same company to handle the entire process.
We understand that decisions about acquisitions and mergers can be complex and difficult to handle without the right professional advice. We want to make it easy for small businesses to receive the necessary advice and due diligence services needed for a successful transaction.
That’s exactly why we went through the process of getting approval from the Solicitor’s Regulatory Authority to be able to employ solicitors who can provide legal advice alongside our accounting services.
We are proud to say that we have received approval from the SRA to offer legal advice and services and we now have a team of fully qualified solicitors so that we can offer both accounting and legal services under one roof. If you would like to find out more about our merger and acquisition services and due diligence, please contact us.