Don’t buy a business blind: the due diligence checklist that could save your deal

Buying a business is one of the biggest commercial decisions an owner or investor will make. The excitement of a deal, a seller keen to move quickly and the pressure to keep costs down, can all make it tempting to rely on the headline numbers and a handshake. That is often where problems begin.

Legal due diligence is how a buyer finds out what they are actually buying. It looks at the target’s contracts, liabilities, people, assets and compliance history, and shows up the risks that a set of accounts or a sales pitch will not. Done properly, it does three things:

• It protects value – It turns up the liabilities that could wipe out the return you expect
• It gives you negotiating power – Each issue it finds can support a price reduction, retention, a specific indemnity or a condition to completion
• It shapes the deal documents – The warranties and protections in the purchase agreement are only as good as your understanding of the business behind them.

Put simply, if a problem is found before completion, it’s a point to negotiate. If it’s found after completion, it’s usually your problem.

Below are some of the key areas every buyer’s due diligence should cover.

1. Corporate: who owns the business, and can they sell it?

Start with the basics. Check the company’s constitution, statutory books and Companies House filings, and confirm who owns the shares and whether they are free from charges, options or pre-emption rights. Look at any shareholders’ agreement, the group structure and board approvals. If the seller cannot show clear title to the shares, everything else is built on sand.

2. Intellectual property: is it really theirs?

For many businesses, IP is where the value lies. Check that trade marks, patents, designs, software, domain names and know-how are registered, owned or validly licensed. Make sure that work created by founders, employees and contractors has been formally assigned to the company. Unassigned IP is one of the most common problems we see, and it can be costly to put right after completion.

3. Assets and property: what are you actually getting?

Confirm that the business owns, or has the right to use, the assets it relies on, from equipment and stock to vehicles and IT systems. For property, review the title or lease terms, rent reviews, break dates, alienation provisions and any dilapidations exposure. Do not assume that everything on the premises belongs to the business.

4. Banking and finance: what debt and security comes with it?

Review the target’s facility agreements, overdrafts, guarantees, invoice finance and asset finance arrangements. Look for security over its assets, change of control and prepayment provisions, and any covenant breaches. Existing lenders may need to consent to the deal or be repaid at completion, and the debt position will feed directly into the price.

5. Commercial contracts: will key relationships survive the sale?

A business is often only as valuable as its customer and supplier relationships. Review the material contracts for change of control, assignment and termination provisions, exclusivity, unusual liability caps and onerous obligations. If a major customer can walk away when the business changes hands, that needs to be known, and reflected in the price, before you commit.

6. Employees: what are the people risks?

People are often a business’s most important asset, and also a source of hidden liability. Review employment contracts, key employee retention, restrictive covenants, incentive schemes, pension arrangements and any ongoing or threatened tribunal claims. Check that workers have been correctly classified as employees or contractors. On an asset purchase, remember that employees may transfer to you automatically under TUPE.

7. Regulatory compliance: is the business operating lawfully?

Confirm that the business holds the licences, permits and authorisations it needs to trade, and that they will survive a change of ownership. Consider its compliance with data protection law (UK GDPR), anti-bribery and anti-money laundering rules, sanctions, health and safety requirements and any rules specific to its sector. Breaches found after completion can lead to fines, damage to reputation and disruption to the business.

8. Litigation: are there disputes waiting to land on your desk?

Look for current, pending or threatened claims, by or against the business, and any history of regulatory investigations or complaints. Even a dispute that looks minor can take up management time and money. The findings should shape the warranties, indemnities and any retention in the purchase agreement.

9. National Security and Investment Act: does the government need to approve the deal?

This is often overlooked. Under the National Security and Investment Act 2021, acquisitions of entities active in 17 sensitive sectors, including defence, energy, communications, data infrastructure, artificial intelligence and transport, may need mandatory notification to the government before completion. A notifiable deal completed without approval is void, and the parties can face significant civil and criminal penalties. Check early whether the target’s activities fall within scope, and build any approval into the deal timetable.

The bottom line

Due diligence is not a box-ticking exercise, nor is it just a cost. It’s an investment in certainty. It allows you to negotiate from an informed position, price the risk properly and complete with confidence. The legal fees involved are almost always small compared with the cost of discovering a serious problem once the deal has completed.

If you are thinking about buying a business, take advice early, ideally before heads of terms are agreed, so that due diligence can be planned around the issues that matter most to your deal.

At HCR Law, our Corporate BRICS team supports acquirers throughout the transaction lifecycle, from initial heads of terms through to completion and beyond. Get in touch to discuss how we can support your next acquisition.