For any firm considering buying a business or selling their own, it’s essential to carry out due diligence to determine if there are any potential risks with the transaction. Due diligence is the process undertaken by a prospective buyer of a business to identify any potential liabilities and to assess its commercial potential. It is undertaken across both the legal and financial aspects of the transaction and is an essential first step in the process.
Traditionally, legal and financial due diligence is conducted by two separate firms: a company’s accountant and a company’s solicitor. Except where a company engages an ABS to do the work. An ABS is an alternative business structure that is regulated by the Solicitors Regulation Authority which allows both solicitors and accountants to work in the same firm so that these two services can now be combined – to the benefit of business owners.
Why combine the two?
What’s the difference?
For business owners, it’s still important to understand the distinctions between legal and financial due diligence as both play a vital role in the process of buying or selling a business:
Financial due diligence
A financial due diligence review aims to determine whether the forecasts provided reflect a true representation of the other company’s performance. The process aims to:
From there, the necessity for any warranties or guarantees in any sale agreement can be assessed, and whether there are any potential issues such as large tax liabilities, outstanding debts or impending financial penalties. These issues may not break the deal, but they could create the need for further negotiation.
Legal due diligence
To gain an overall picture of the company’s operations and the value (or liabilities) it could add to your business, it is imperative to carry out legal due diligence.
Solicitors will research and analyse the potential legal implications of the following:
Uncovering factors such as complications with transferring existing contracts or outstanding litigation issues is essential to ensuring that you head into a purchase or sale fully informed, sufficiently protected and with a fair purchase price agreed.
At Accounts and Legal, we know that decisions surrounding buying and selling a business can be complex. We believe strongly that combining financial and legal expertise puts our clients at a distinct advantage. Sharing and analysing cross-referenced data in-house allows us to provide an informed perspective to support our clients in their most important professional decisions. Despite this, it’s still important for business owners to understand the two to ensure the process of buying or selling a business runs smoothly.
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